Rs.2000 notes may phase-out the demonetisation legacy by Prime Minister Modi

The Reserve Bank of India looks like has decided to slowly phase out the pink crisp notes of Rs. 2000 which were a massive reminder of the demonetisation exercise that took place under the Prime Minister Narendra Modi led government in November 2016. This overnight withdrawal of 500 and 1000 notes and the launch of these fresh ones were made to quickly to balance the loss of currency in circulation. The cues are available in its annual report 2019-2020 which was released on Tuesday.

The annual report stated that the two thousand rupees denomination notes were not at all printed during 2019-2020. However, this does not imply that the currency will become invalid, it simply says that its supply will just be reduced to the point when it eventually disappears.

At the end of March 2018, the number of circulation of Rs. 2000 notes was 33,632 lakh constituting around 3.3 per cent of the total volume of notes while at the end of March 2020 it fell to 27,398 lakh constituting only 2.4 per cent.

In 2017, the major focus of the government was on remonetising the economy and hence the Rs.2000 notes had a share of 50 per cent. But by the end of March 2018, it came down to 37.3% further falling to 22.6% at the end of March 2020. Nevertheless, both in terms of value and volume the circulation of Rs.500 and Rs.200 notes have gone up respectively, over the three years from the beginning of 2018.

The RBI report suggests that these notes are being phased out because they aid hoarding, tax evasion and money laundering. The total value of the currency in circulation as of March 2018 in India was Rs. 18.03 lakh crore out of which 37% was in Rs. 2000 notes and approximately 43% in Rs.500 notes.

Although the government has denied any plan of phasing out the Rs.2000 notes. The latest reports about the Rs,2000 notes weren’t meant to be anything else but a quick fix.

A former banker told that there may be some people hoarding the Rs. 2000 currency notes but they may be few. “Banks are not reissuing Rs 2000 notes and maybe banks have been told by RBI not to reissue Rs 2000 notes. Also, it’s easy to calibrate ATMs with lower currency notes. Rs 500 notes are easier to use and convertible. The world over, the 2000 denomination currency is rare,” he added.

A senior banker in a conversation with a news agency said that the RBI might be very clearly phasing out the Rs. 2000 currency notes without demonetisation, as they aren’t receiving any new supply of it.

At the time of demonetisation, almost 86% of the currency was sucked out, overnight and led to a shortage of cash. To fill this gap they introduced the Rs.2000 notes as fewer notes had to be printed.

“About 60-65% of India lives below the global poverty line of less than $2 a day so we don’t need such high domination notes,” Anil Bokil Founder of the Pune based think tank Artha Kranti Pratishthan said.

Soumya Kanti Ghosh, chief economist of State Bank of India said, “It makes sense to phase out these notes as one of the primary objectives of the currency notes is its transaction value which becomes a challenge with such high denomination.”

The main objective of demonetisation according to PM Modi led government was to remove the unaccounted money. Uday Kotak the managing director of Kotak Mahindra Bank, last year at an event said that he thinks that there would have been significantly better outcomes if the government had just thought about simple things. “If you are taking out Rs. 500 and Rs. 1000 notes why would you introduce Rs. 2000 notes?” he added.

Another economist on the condition of anonymity said, “It is unbelievable that the government and the RBI missed such important points about why the Rs2,000 notes may not work. A significant amount of money has gone in the printing of these Rs2,000 notes which when phased out will have to be replaced by printing more other denomination notes which will be a further cash-burn which is an utter waste.”

However, the phasing out of the Rs.2000 notes is unlikely to have a major impact on the economy if the central bank decides to increase the printing of Rs.500 and other small denominations. It is important to have more number of Rs. 500, Rs. 200, Rs. 100 and other small notes to stabilise the economy. Nevertheless, the demonetisation exercise will always be remembered a poorly planned and pointless strategy.

Image Credits- Free Press Journal

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