EFFECT OF WITHDRAWAL OF RS 2000 NOTES ON INDIA’S ECONOMY

On Friday, the Reserve Bank of India (RBI) announced the withdrawal of Rs 2,000 banknotes from circulation effective immediately. It also announced that the public can exchange their notes in banks from May 23, 2023. You can exchange up to Rs 20,000 per exchange till September 30, 2023.

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This announcement reminiscent of the demonetisation seems to have come all of a sudden with little to no warning to the general public.

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In the circular “?2000 Denomination Banknotes – Withdrawal from Circulation; Will continue as Legal Tender”, dated May 19, 2023, RBI states the following:

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1. The ?2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934, primarily 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 in circulation at that time. The objective of introducing ?2000 banknotes was met once banknotes in other denominations became available in adequate quantities. Therefore, printing of ?2000 banknotes was stopped in 2018- 19.

2. About 89% of the ?2000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years. The total value of these banknotes in circulation has declined from ?6.73 lakh crore at its peak as on March 31, 2018 (37.3% of Notes in Circulation) to ?3.62 lakh crore constituting only 10.8% of Notes in Circulation on March 31, 2023. It has also been observed that this denomination is not commonly used for transactions. Further, the stock of banknotes in other denominations continues to be adequate to meet the currency requirement of the public.

3. In view of the above, and in pursuance of the “Clean Note Policy” of the Reserve Bank of India, it has been decided to withdraw the ?2000 denomination banknotes from circulation.

4. The banknotes in ?2000 denomination will continue to be legal tender.

5. It may be noted that RBI had undertaken a similar withdrawal of notes from circulation in 2013-2014.

6. Accordingly, members of the public may deposit ?2000 banknotes into their bank accounts and/or exchange them into banknotes of other denominations at any bank branch. Deposit into bank accounts can be made in the usual manner, that is, without restrictions and subject to extant instructions and other applicable statutory provisions.

7. In order to ensure operational convenience and to avoid disruption of regular activities of bank branches, exchange of ?2000 banknotes into banknotes of other denominations can be made upto a limit of ?20,000/- at a time at any bank starting from May 23, 2023.

8. To complete the exercise in a time-bound manner and to provide adequate time to the members of public, all banks shall provide deposit and/or exchange facility for ?2000 banknotes until September 30, 2023. Separate guidelines have been issued to the banks.

9. The facility for exchange of ?2000 banknotes upto the limit of ?20,000/- at a time shall also be provided at the 19 Regional Offices (ROs) of RBI having Issue Departments1 from May 23, 2023.

10. The Reserve Bank of India has advised banks to stop issuing ?2000 denomination banknotes with immediate effect.

11. Members of the public are encouraged to utilise the time up to September 30, 2023 to deposit and/or exchange the ?2000 banknotes. A document on Frequently Asked Questions (FAQs) in the matter has been hosted on the RBI website for information and convenience of the public.

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(As declared in the press release)

*Guidelines

**Frequently Asked Questions

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Why now?

‘Why now’ seems to be the biggest question among most. Especially seeing that the decision comes just before the upcoming general election in 2024 and the state election later this year.

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Will it affect the economy of the country?

Economists and financial experts seem to widely think that this new decision by the Indian government will not largely impact the economy of the country. This is owed to the rapid digitalisation of the payment system in the country.

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Demonetisation came at a time when online payments and transactions were still things of novelty. It was not the preferred mode of transaction of lower and middle economy people then. But now, with the advent of software applications making transactions easier and paperless, the use of actual paper cash has reduced drastically. And among those who still use real money for transactions, Rs 2000 notes do not play a major role as the actual quantity in circulation has reduced by almost 20% in the last 3-4 years.

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Kranthi Bathini, Equity Strategist, WealthMills Securities said: “The move will not impact the market and economy because the circulation of currency is already less. At the same time, the digitalisation payment system is also very strong in the country.”

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Market analysts seem to think this move of government right before general elections is to target the movement of black money. Higher denomination notes were stopped from being issued 4 years back. So any large quantities of higher denominations will either be from black money hoarders or involve illegal transactions.

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This move may ultimately decrease the quantum of black money and help improve tax collections. It will also ease the increase of deposit rates in banks and lead to moderation in short-term interest rates.

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The main reason for the introduction of these notes in 2016 was to lessen the burden on the economy while the RBI worked on increasing the quantity of lesser denominations in circulation.

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The total value of these banknotes has declined from 37.3% in 2018 to 10.8% of notes in circulation as on March 31, 2023. Hence, we can say that the government has moved towards withdrawing these completely from circulation now as they have served their purpose.

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Why the controversy?

For those who are questioning the motive and logic, especially those who were most affected during the demonetisation of 2016, this move may raise doubts or come as a second blow.

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This may constitute people or businesses still largely reliant on cash transactions for a variety of reasons from working capital to labour charges. In sectors like real estate and construction businesses, it might prove to be more than a practical hindrance of exchanging notes every day.

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Now, how does the timing of this appeal to sound economic policy or thinking, especially in a growth trajectory characterized by a lack of job creation and poor investments?

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To some, the announcement of a Rs 20,000 limit for exchanging Rs 2,000 notes appears to be motivated by a desire to monitor the rate and scale of exchanges involving large sums of these notes. This could potentially provide centralized agencies, influenced by the Modi-Shah alliance, with a tool to selectively target specific businesses, individuals, or political opponents.

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While the idea may seem reasonable and a minor measure within the framework of RBI's monetary policy, it is crucial to consider the timing and political-economic implications surrounding this announcement, for example, the election results of the BJP in Karnataka and the upcoming state elections. One should also notice the exact time of the announcements - after Friday’s stock market closed to avoid immediate panic or a snowball effect.

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Moreover, there are significant doubts regarding the "state capacity" and the challenges of implementation within an already burdened public-sector banking system, specifically due to bureaucratic constraints. This poses a hurdle for the effective execution of any "centralized" announcement. Those who have firsthand experience dealing with demonetisation and the subsequent crisis in management and the public sector bureaucracy are well aware of these difficulties.