The Reserve Bank of India has announced the withdrawal of Rs. 2,000 currency notes from circulation. The move to withdraw the Rs 2,000 notes is aimed at reducing reliance on high-denomination currency and promoting digital payments. As of March 2023, Rs. 2,000 notes accounted for approximately 11% of the currency in circulation. An upper limit of Rs 20,000 per person per exchange has been set. The concern behind this move is the potential hoarding of black money using the highest denomination notes.
The Rs. 2,000 notes are not commonly used for everyday transactions. Their high denomination makes them less suitable for small-value purchases, which leads to limited circulation and usage-only 10.8% of the total notes in circulation There are concerns that the highest denomination notes, including the Rs 2,000 notes, are being used for hoarding black money, which refers to undisclosed or illegally obtained wealth. By withdrawing these notes, the RBI aims to discourage such practices and promote transparency in financial transactions. The move to withdraw these notes is part of a broader effort to reduce reliance on cash and promote digital payments in India. The Government has been actively encouraging the use of digital platforms for transactions, aiming to create a less cash-dependent economy.
It’s worth noting that the withdrawal of the Rs 2,000 notes differs from the demonetization exercise of 2016, where the Rs 500 and Rs 1,000 notes were invalidated overnight. In this case, the Rs 2,000 notes will remain legal tender until September 30, providing individuals sufficient time to deposit or exchange them at banks, and the other high-denomination Rs 500 notes are very much in circulation.
The withdrawal of Rs. 2000 notes is aimed at shifting the economy from a predominantly cash-based system to a more formal and transparent one. It sought to encourage the use of digital transactions, promote financial inclusion, and bring more people into the formal banking system. This will widen the tax base by bringing previously unreported or underreported income into the tax net. The adoption of digital payment methods such as mobile wallets, online banking, and card transactions will get a further boost. India already ranks at the top in digital transactions.
The sudden withdrawal of high-value currency notes has its own challenges. Cash-dependent sectors, such as small businesses, agriculture, and the informal sector, get hit hard as they heavily rely on cash transactions. During demonetisation, people faced difficulties accessing their own money, leading to long queues at banks and ATMs. Small and medium-sized enterprises and small-time business houses with limited resources struggle to cope with the cash crunch. The informal sector, which constitutes a significant portion of India’s economy, gets particularly affected. The Government should consider raising the set limit of 10 notes exchanged for business houses after proper verification of transactions.
Agriculture is another sector heavily reliant on cash transactions and, as such, must be taken care of. Some sort of banking camp in villages is needed to ensure farmers can deposit their money in one go instead of visiting banks time and again. The disruption in the rural economy had long-lasting effects on the livelihoods of farmers and rural communities.
The sudden surge in cash deposits and exchange requests overwhelms the banking system. Banks face challenges in managing the influx of cash, verifying the authenticity of deposits, and meeting the cash demands of the public. The increased workload for banks leads to inefficiencies and inconveniences for customers. The Government must ensure such a situation doesn’t come up this time and all these issues are taken care of.
Citizens support this decision made in the best interest of the nation, and it is crucial for the Government to ensure that it does not adversely affect the general public or cause any undue hardship for genuine businessmen and individuals.
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