Business News/ Opinion / Columns/  The withdrawal of 2,000 notes is short of a rational explanation

The withdrawal of ₹2,000 notes is short of a rational explanation

On 19 May, in pursuance of its ‘Clean Note Policy,’ the Reserve Bank of India (RBI) decided to withdraw ₹2,000 denomination banknotes from circulation

Photo: MintPremium
Photo: Mint

On 19 May, in pursuance of its ‘Clean Note Policy,’ the Reserve Bank of India (RBI) decided to withdraw 2,000 denomination banknotes from circulation.

The 2,000 note was introduced after the demonetization of 500 and 1,000 notes in November 2016 to curb financing of terrorism and drug trafficking through fake Indian currency notes and to discourage the use of high-denomination notes for the storage of unaccounted wealth.

If the idea was to discourage people from storing their unaccounted black wealth in 500 and 1,000 notes, then why introduce a 2,000 note to replace them? Storing unaccounted black money in 2,000 notes is easier, given the higher denomination.

Of course, RBI’s recent move is in no way comparable to demonetization in 2016, when 500 and 1,000 notes lost their legal-tender status in a matter of hours. As of now, 2,000 notes continue to be legal tender and can be either deposited or exchanged at banks until 30 September 2023.

The deadline leads to the question of whether these notes will continue to be legal tender after that date. On 21 May, MyGovIndia, a citizen engagement platform of the government, clarified that the 2,000 note will continue to be legal tender post-30 September.

Indeed, the move to withdraw the 2,000 note brings several issues to the fore. First, if these notes will continue to be legal tender after the deadline, then why withdraw them? RBI in its 19 May press release had said that the 2,000 note was introduced “to meet the currency requirement of the economy in an expeditious manner after the withdrawal of legal tender status of all 500 and 1000 banknotes." Now more than six-and-a-half years later, the objective of introducing the 2,000 note has been met.

This again takes us back to the question: Why replace 500 and 1,000 notes with a 2,000 note? With some planning, new notes of 500 could have been printed in adequate quantities before demonetization and used to replace demonetized ones.

Second, as of March 2017, 2,000 notes formed a little over 50% of the total currency in circulation in value terms. This had come down to just 10.8% by March 2023. Over the years, RBI has issued more new currency notes of other denominations and it has gradually withdrawn 2,000 notes from circulation.

That led to the total value of 2,000 notes in circulation falling from 6.57 trillion in March 2017 to 3.62 trillion in March 2023. This could have easily continued, and over the next few years, the value of the 2,000 note as a proportion of our total currency would have fallen below an insignificant 5%.

Third, the logic offered by those in support of the move is that it will help curb black money on the assumption that people store their unaccounted wealth in currency form. The 2012 White Paper on Black Money had offered some data on this front for a period of six years based on search and seizure operations carried out by the investigative wing of the Central Board of Direct Taxes. On average, currency typically formed less than 5% of the total undisclosed wealth identified. So, very little black wealth is held as currency.

Also, once demonetization was done, it was assumed (even by some famous economists) that people who had black wealth in currency form wouldn’t deposit it in banks. But more than 99% of the demonetized currency came back to RBI, with 15.31 trillion worth of 500 and 1,000 notes being returned. This time, the amount involved is considerably lower at 3.62 trillion, with the overall currency in circulation having almost doubled from where it was before demonetization. There is no reason to believe that what happened post-demonetization won’t happen again. There are enough and more ways to go about it.

Fourth, such moves damage India’s long-term ambition of making the rupee an international reserve currency. Fifth, currency is still a very important part of India’s economic system. As of March 2023, it stood at around 12.3% of our gross domestic product (GDP), around the same level it was before demonetization. Hence, any attempt to take currency out of the economy in one shot is a bad idea.

Sixth, there is this great belief that cash facilitates corruption. It might facilitate petty corruption and some large corruption, but corruption at larger levels doesn’t always need cash to be paid domestically. Take the case of Nigeria, which is one of the most corrupt countries in the world. It also has one of the lowest ratios of currency in circulation. Or take the case of the Eurozone, the countries which are members of the EU and use the euro as their currency. Their currency-in-circulation to GDP ratio as of December stood at 12.1%, very similar to India’s.

So, why did RBI decide to withdraw the 2,000 note? There is clearly no rational answer for this. It reminds one of something that David Shields writes in The Trouble With Men: “Economists… have faith in reason. Life, though, doesn’t conform to logic. At some point, despite our best efforts, we’re all flying blind. Good economists know and accept this." It’s time to do just that.

Vivek Kaul is the author of Bad Money.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 24 May 2023, 01:49 AM IST
Recommended For You
Get alerts on WhatsApp
Set Preferences My Reads Watchlist Feedback Redeem a Gift Card Logout