Wg Cdr Mahesh Chander Sudan (Retd)
We, the people of India, have once again been exposed to shocks of demonetization wherein banknote of Rs. 2000/- denomination is scheduled to be withdrawn from the circulation by 30 Sep 2023. This denomination of the banknotes was introduced during previous demonetization exercise carried out in the year 2016 when banknotes of the Mahatma Gandhi Series were removed/replaced accordingly for circulation. The government of India then claimed that the demonetization action would curtail the shadow economy, boost up cashless transactions and check the use of illicit and counterfeit cash to fund illegal activity and terrorism especially in Jammu and Kashmir and north east states. While announcing removal of highest value banknote from circulation between 23 May 2023 to 30 Sep 2023, the Reserve Bank of India informed that the subject denomination of the bank notes was introduced with an objective of meeting the currency requirement of the economy expeditiously then and over the period of time, it is felt that this denomination is no longer commonly used for transactions and adequate stock of banknotes of other denominations is available for currency requirements.
However, it is a matter of fact that a diligent and pragmatic approach in handling currency circulation would have encouraged economic activity by increasing the market space for various goods especially at this time when economy has just caught up recovery post recent recession. For any good and healthy decision, past history helps in evaluating pros and cons of the issue at hand and in this case fall outs of demonetization carried out in year 2016 could be of immense value. The main objective, as informed by the then government, was to check the flow of black money, funding of illegal activities including human trafficking and counterfeit currency. Other stated objectives included expanding the tax base and increasing the number of taxpayers, reducing the number of cash transactions and minimizing availability of finances with terrorists, Maoists and integration of formal and non-formal economies. It however emerged that government was later described as having shifted its goal posts from black money, corruption and terrorism to making India cashless economy.
Over the period time, there were few other effects that slowed down economic activities across the spectrum. Shortage of Cash due to demonetization led to chaos and people faced difficulties in depositing/exchanging demonetized bank notes with short span of time provided then. It also affected transport industry, around eight lakh drivers and conductors suffered cash shortage for carrying out daily routine transactions as claimed by All India Motor transport congress and around 400,000 trucks got stranded on major high ways across India even to an extent that toll plaza operators refused to accept demonetized banknotes that made Ministry of Road Transport and highways to announce suspension of toll tax for some time till 02 Dec 2016. Stock market, Industrial Output and Agriculture sector were also exposed to negative fall outs of demonetization that ultimately led to drop in GDP growth rate, rise in unemployment and avoidable cost to banks on printing of new banknotes that affected government dividend as well. Besides cost of printing, the banks incurred cost in collection, storage and movement of banknotes across the country due to involved urgency and uninvited calibration of ATM for newly printed banknotes on account of varying sizes. Some of the government welfare schemes like Mid-day meal were negatively impacted; few other schemes were either deferred or delayed.
There was some death cases reported across the country due to long waiting period in queues for exchanging demonetized banknotes within allowed window. Even the economist across the globe differed in their opinion about that demonetization except for few like Jagdish Bhagwati and others, most of them including chief economist of the world bank Kaushik Basu termed it a major mistake and Pronab Sen, the former Chief Statistician and Planning Commission member called it a hollow move as it did not address any of the preset goals like Black Money etc. Except for the period of COVID-19, Cash circulation in India has increased significantly since demonetization and the exercise of demonetization has not necessarily converted cash users to digital users.
In view of foregoing facts, it appears that the withdrawal of Rs. 2000/- banknote has more to do with upcoming elections of Legislatures and Parliament as the high value cash is more likely to be used in elections and its withdrawal from the economy may help preventing misuse of cash and promote transparency in transactions, as commented by Rupa Rege Nitsure, the Group Chief Economists of L&T finance holdings. At the same time, Central Bank (RBI) has time and again conveyed that it intends to reduce high value notes in circulation and had stopped printing 2000 rupee notes for last four years as this denomination banknote are less used in market for transactions. For easy understanding, a banknote is a negotiable promissory note which one party can use to pay another party a specific amount of money unlike barter system where services and goods are exchanged for other services and goods.
As regards 2000 banknote, it was introduced during last demonetization carried out on 08 Nov 2016 and being withdrawn as a part of Reserve Bank of India clean Note Policy that aims to provide the public with high quality currency notes and coins with improved security features. As of 31 March 2023, the value of 2000 banknote has decreased to 3.62 Lakh crore in circulation, constituting only 10.8% of the total banknotes in circulation. The impact of withdrawal of high value bank note is expected to be marginal, it is unlikely to disrupt normal life or the economy as adequate stock of other denominations are available for circulation, however it would certainly reduce an option introduced to meet immediate currency requirement during last demonetization of 2016.
Besides these facts, impact of removal of this high value currency option may be realized over the period of time, however it is expected that it would temporarily slowdown economic activities, limit options of currency notes, administrative cost, a pinch of pain to cash driven sectors as retail, hospitality and small businesses. However, in the long run it may help in stabilization of currency, check on corruption, black money , encourage digitization of commercial transactions, raise transparency by pushing informal economic activity away from black and gray markets despite the fact that experience from last demonetization exercise carried in 2016 has not been very encouraging and hopefully may not be revisited.
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