D. M. Deshpande
The RBI has recently withdrawn Rs.2,000 notes from circulation. However, the apex bank has clarified that these notes shall remain a legal tender. There is a window available for all to deposit or exchange 2k notes in banks till September 30.
There is enough time to act; there is no problem on that score but no one knows what will happen to the status of this currency after the dead line specified by the RBI. The RBI has not given any commitment, instead has implied that they will cross the bridge when they come to it.
In fact, it is the government not the RBI that has the powers to strip off the legal tender status of currency. All this has created wide spread uncertainty in the market. There are reports of not accepting Rs 2000 notes for payments now itself. Quickly, demand for buying gold and jewellery has gone up. At petrol pumps use of the notes has seen a sudden spurt. Seeing an opportunity to make money, the highest denomination cash is selling for a discount.
As soon as the withdrawal announcement was made, it set off a trail of panic that naturally led to recall of those days in 2016 when massive demonetization exercise was carried out. Fortunately, it was soon realized that the RBI’s move will not cause any major disruption and hence there was no scramble to get rid of high value notes.
Officially, the RBI has maintained that the Rs 2000 note was due for withdrawal as it was causing a great deal of inconvenience to users in terms of finding requisite smaller value notes. Normally high value notes are not meant for daily use and exchange and therefore have a longer life span, of four to five years.
The RBI had already discontinued printing of these notes since 2018-19. Hence, existing notes in circulation had reached end of their life span. Under the ‘clean note policy, the RBI is obliged to issue new currency and replace the older, soiled or mutilated notes. But it is a mystery how the RBI decided the whole lot of Rs 2000 notes are spoiled.
In the 2016 demonetization of currency, more than 84 per cent of the cash in circulation was withdrawn at a very short notice. It led to a fall in GDP as the informal economy and small businesses were hit. However, now in the case of withdrawal of Rs 2,000 notes, just about 10.8 per cent of the currency in use is impacted. Moreover, digital payments through millions of phones will ensure that payments and settlements will not be impacted to any great degree.
There is speculation of the move resulting in inflation. On the contrary, if it results in reduction of currency in circulation (CIC), it may actually lead to fall in prices. We will have wait and see what will happen to CIC in the next three months.
One of the stated objectives of DeMo was to curb the prevalence of black money in high value currency. However, the government did not anticipate that it had to quickly remonetize the economy as absence of cash was causing massive hardships and disruptions. Therefore, as an emergency and perhaps as an interim measure, it undertook printing of Rs 2000 currency though it was in contradiction to its stated objective.
Hence, these notes accounted for Rs.6.57 lakh crores or over 50 per cent of the total cash with public in 2016-17. It reached its peak in 2017-18 with Rs 6.73 lakh crores; subsequently, it has come down to Rs 3.62 lakh crores in 2022-23. The printing of the notes was stopped in 2018-19 itself. Clearly, the withdrawal was planned since then but was never spelt out in clear terms. As a result, individuals and institutions began hoarding Rs 2000 notes.
Since there isn’t enough clarity on certain issues of note withdrawal, it has given rise to speculative reactions. A section of the press has reported that the Rs 2000 notes withdrawal is linked to the problem of fake currency. India is facing a deluge of counterfeit currency mostly smuggled into India from Pakistan and Bangladesh. Of late surveillance has increased after treaties have been signed with Nepal and Bangladesh.
The RBI Annual Report 2021-22 indicates that fake currency in denominations of Rs 500 and Rs 2,000 jumped up by 101.9 per cent and 54.6 pder cent respectively when compared with the previous year. What happened to the claim that the new notes are not easy to copy?
In fact, the government announced new feature in RS 2000 notes that was supposed to improve the safety factor. If that is indeed the reason for withdrawal, then what happens to Rs 500 notes where the fake notes printing has gone up by over 100 per cent in a year?
It appears that the reason for withdrawal is more political than economic. As there are elections in five states later in this year and the general elections in the next, this school of thought is further reinforced. If it is so, it raises a disturbing question of the role of RBI that is supposed to be an autonomous institution.
DeMo, note withdrawal and such other events are unbecoming of a nation that is aspiring to take its currency places in international trade. Stability is the hallmark of a strong global currency. It is also the basic test of endurance at the international level. In the middle east, currency exchanges in UAE are refusing to accept Indian rupees.
Some exchanges incurred losses in the 2016 DeMo exercise by the Indian government. Sending 2K notes to India is a cumbersome process and currency exchanges do not know whether the Rs 500 notes too will go the same way. Surely, such disruptions could be avoided with some proper planning and communication.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh.