The Reserve Bank of India suddenly announced that it is withdrawing the Rs 2,000 note from circulation. It is nowhere near a cataclysmic move as the 2016 demonetisation, but it raises some uncomfortable questions about policymaking.
First, what does this mean for my 2K notes?
Not very much—unless you are in an industry that relies heavily on large cash transactions—like real estate or farming.
The announcement: The RBI said that the Rs 2,000 note will be withdrawn from circulation. The Rs 500 note will now be the highest available denomination—unless the government changes its mind and brings back the Rs 1,000 note.
Your 2K notes: can be exchanged at the bank for smaller notes until September 30. You can only exchange up to Rs 20,000 at a time (ten 2K bills)—but you can deposit an unlimited amount of Rs 2K bills into your bank account. Technically, your 2K note is still legal tender even after that date—but it is highly unlikely anyone will accept them. In fact, most vendors are already saying ‘no’ to the soon-to-be defunct bill.
Point to note: You can go to any branch of any bank to exchange your notes—whether or not you are an account holder. There is no need for any kind of documentation or ID proof.
Whew! Okay, so why are we doing this?
Here’s the reasoning offered by the RBI/government officials:
One: The 2K notes were introduced to quickly infuse cash into the system after demonetisation—when suddenly all the Rs 500 and Rs 1,000 notes became useless. It allowed people to speedily swap out large amounts of cash—at a time when there weren’t enough legal banknotes in circulation. Today, there are sufficient notes of other denominations in circulation—so there is no need for the 2K note.
Two: The 2K note had always been a temporary measure—to address the shock of demonetisation. The RBI says it stopped printing Rs 2,000 notes in FY2019. Most of these notes are old and will soon become unusable. In fact, the 2K note is no longer used in most transactions. They constitute only 10.8% of all notes in circulation—at a value of Rs 3.62 trillion. This is a big drop from 2018—when they accounted for 37.3% of all notes—at a value of Rs 6.73 trillion.
Three: High denomination notes make it easier to hoard large amounts of black money—which is also the reason the government scrapped the Rs 1,000 note in 2016.
Point to note: Many experts don’t think the move will have a negative impact on the economy:
This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity. Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly.
And it will help boost the cash reserves of banks—since people with large amounts of Rs 2K notes will deposit them in their accounts. According to a new report, the banks’ deposit base will jump between Rs 400 billion to 1.1 trillion (40,000 crore to 1.1 lakh crore)—“even if just about a third of these heavily hoarded high currency notes are flushed out by the exercise.”
So this was a good move all around, then?
Actually, the announcement sparked a storm of criticism, and here’s why:
One: For starters, many experts say the 2016 demonetisation did not do much to dent the amount of black money in the system. And this latest move is just more showboating on the part of the government.
- The government claimed that overnight demonetisation of Rs 500 and Rs 1,000 notes would render a great part of black money completely useless.
- Yet, in 2018, the RBI reported that “99.3% of the money withdrawn from circulation had been returned to banks, indicating either there was less ‘black money’ than expected, or that schemes to launder money were more successful than thought.”
- The government had claimed that approximately Rs 3 trillion (3 lakh crore) of demonetised currency notes—held in black money—would be rendered useless. The actual amount was Rs 107.2 billion (10,720 crore).
Two: The government said it was withdrawing Rs 1,000 notes because high-denomination bills made it easy to hoard black money and fund terrorism—then promptly replaced them with a Rs 2,000 note. And now, it is using the same logic to withdraw the 2K note, as well.
Point to note: ATM machines across the nation had to be recalibrated in order to dispense 2K notes—because of their unique size. It’s odd to force such a wholesale change and then claim that these notes were always meant to be temporary.
Three: Swapping out notes hasn’t made a dent in the circulation of counterfeit money, either.
- RBI data shows that by March 2020, Rs 2,000 notes accounted for more than 45% of all counterfeit currency by value. As of March 2022, that number stood at a significant 33%.
- The amount of fake currency actually increased after demonetisation. The 2022 RBI data shows a 101.9% increase in fake Rs 500 notes—and 54.6% jump for Rs 2,000 notes.
- Worse: the number of fake small currency notes had soared by 2018: "Compared to the previous year, there was an increase of 35% in counterfeit notes detected in the denomination of Rs 100, while there was a noticeable increase of 154.3% in counterfeit notes detected in the denomination of Rs 50."
Point to note: The RBI spent Rs 79.65 billion (7,965 crore) in 2016-17 on printing new notes—the total soared to Rs 49.12 billion (4,912 crore) in 2017-18.
Four: While the 2K ban will not affect industries and individuals whose transactions are primarily digital, it will still have a significant impact on others:
High denomination notes are introduced for ease of transactions as the economy expands and there is inflation. More and more money is required. Especially in India where a large number of transactions are in cash. There are over 6 crore micro and small business entities and about 11 crore farmers who use cash for working capital. Further, the well-off households keep cash for precautionary reasons for some emergency, etc.
Imposing any unnecessary pain on a sluggish economy with minimal job growth seems unwise.
Five: Last not least, some cynics view the move as aimed at cleaning up the BJP’s image—ahead of the upcoming state elections:
Perhaps the ruling party has been influenced by the flak it faced during the recently concluded Karnataka elections. The slogan ‘40% ki sarkara’ had dented the image of the ruling party. So, just like demonetisation was used to create a perception that the government is proactive against black money, same is sought to be done now. It worked in 2016 when the poor accepted that the ruling dispensation was acting against the black money holders.
If so, then—as Raghu Sanjaylal Jaitley points out—this electoral gamble is not cost-free for the tax-paying voter:
The cost of the logistics of sending all Rs 2,000 notes back from ATMs and branches to the RBI, replacing them with notes of other denominations, the extra hours spent by people exchanging their notes in batches of Rs 20,000 and the additional measures to be taken to check for the provenance of the money that will come into the banking system and the risk of frauds during this process are all additional costs to the system.
OTOH: The elections are also cited by defenders of the move—who point out that the use of black money surges in poll season.
The bottomline: The real problem is that the government has developed a reputation for making sweeping changes without warning or explanation—and often, without much forethought.
Reading list
Mint has everything you need to know about how the move will affect you. The Print has an excellent timeline that captures the convoluted history of the Rs 2,000 note. For the best critiques of the decision to withdraw the note, read this newsletter by Pranay Kotasthane and Raghu Sanjaylal Jaitley called ‘Anticipating the Unintended’ and Arun Kumar’s piece in The Wire. Reuters look at the impact on the economy. India Today lays out the numbers that capture the fallout of the 2016 demonetisation.
