On 2000 Rupee Note Withdrawal

In 2016 the Indian government abruptly banned the use of 500 and 1000 rupees notes to curb (as initially told to people by the then finance minister Arun Jaitley) corruption, black money, counterfeit currency, and to combat terrorism. Within a month’s time everyone including the government knew demonetization failed to achieve its stated objectives so they changed their goal to a cashless digital economy. Within a year’s time 99% of cash was back in circulation and RBI received more currency notes of 500 and 1000 in their accounts than they could account for, suggesting people were able to deposit even fake notes! In the aftermath of such a knee-jerk policy decision the economy tanked and unemployment shot up. 

As if such a blunder of demonetization was not enough, the Indian central bank RBI immediately started issuing a totally new 2000 rupees note to, as per RBI governor,

Rs 2000 bank notes were introduced primarily to replenish the notes withdrawn following demonetisation, the RBI chief said.

This policy decision made no sense. If the original purpose of demonetizing 500 and 1000 rupees notes was to curb black money and corruption – which RBI believed was mainly carried out using these 500 and 1000 rupees notes – then how would replacing those denomination notes with even bigger denomination 2000 rupee note have helped solve the problem of black money and corruption? Or counterfeit currency and terrorism? Will doing corruption and stashing away more black money not become easier using 2000 rupees notes instead of 500 and 1000? Remonetizing the economy with 2000 rupees notes defeated the whole purpose of tackling black money or corruption etc. And if the worry of the RBI was deflation and disruption of day to day exchanges, which were guaranteed, then there was no need to deflate the money supply by demonetizing 500 and 1000 rupees notes in the first place. RBI didn’t need to replenish the economy with 2000 notes if they didn’t demonetize 500 and 1000 rupee notes. Demonetization didn’t achieve its stated goals but it did wreck the economy pretty badly for sure. For no good reason the Modi government and its central bank RBI made a mess of the economy and 1.4 billion peoples’ lives. 

Demonetization came and went. After that the Modi government delivered few more mortal blows on the body economic in the ensuing years in the form of haphazard implementation of GST and then deadly and totally unnecessary covid lockdown. 

When people were slowly forgetting and recovering from the wounds of demonetization and other policy blunders of the Modi government, they suddenly dealt another blow to the people of India in the form of a sudden announcement of the withdrawal of those remonetized 2000 rupees notes few days back. This time the reason for demonetizing 2000 rupees notes is different. RBI’s communique said, 

The ₹2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934, primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of legal tender status of all ₹500 and ₹1000 banknotes in circulation at that time. The objective of introducing ₹2000 banknotes was met once banknotes in other denominations became available in adequate quantities. Therefore, printing of ₹2000 banknotes was stopped in 2018- 19.

2. About 89% of the ₹2000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years. The total value of these banknotes in circulation has declined from ₹6.73 lakh crore at its peak as on March 31, 2018 (37.3% of Notes in Circulation) to ₹3.62 lakh crore constituting only 10.8% of Notes in Circulation on March 31, 2023. It has also been observed that this denomination is not commonly used for transactions. Further, the stock of banknotes in other denominations continues to be adequate to meet the currency requirement of the public.

3. In view of the above, and in pursuance of the “Clean Note Policy” of the Reserve Bank of India, it has been decided to withdraw the ₹2000 denomination banknotes from circulation.

Again this reason of clean note policy for demonetizing 2000 rupees notes doesn’t make any sense. As per RBI’s own communique they were already demonetizing 2000 rupee notes quietly since 2018-19 when they stopped printing those notes. They should’ve continued to replace 2000 notes without putting people in a panic mode like this again. The whole logic of withdrawing 2000 rupees notes from circulation also does’t make any sense because RBI is saying that these notes will continue to be legal tender even after the deadline of depositing or exchanging those notes pass by on 30th September, 2023! If a currency will be a legal tender then why would anyone exchange or deposit it back with the RBI? In that case notes will not be withdrawn from the economy. 

Overall this whole exercise is futile for its given objectives. We don’t yet know the ulterior motives of the government. Maybe they will abruptly cancel 2000 notes after September deadline to surprise the public which didn’t exchange or deposit those notes thinking they are legal tender even after withdrawal. If they decide to cancel these notes post deadline then the ensuing recession will be horrible as 2000 notes represent some 10% of the present money supply! Suppose even if 7% or 5% of that money supply comes back to RBI, still 3-5% of money supply will remain in the economy post deadline. Cancelling that money supply will send shockwaves through the economy which is already struggling because of such policy disasters. The abrupt withdrawal of 2000 notes is already disturbing the economic exchanges in the market as many traders and common people have stopped accepting those notes immediately. In India generally people do not trust their governments and after demonetization in 2016 the trust level has completely disappeared. Government and its central bank RBI broke their monetary promises and nothing will stop them from doing the same again. Also, people have overnight rushed to buy gold using 2000 rupees notes which will lock up sizeable amount of savings in nonproductive gold starving economy of important productive investment. 

Money is the life blood of the body economic. By making market exchanges easy, money makes progress and civilization possible. Without the direct exchange money economy there will be no specialization and division of labor, and without them there will be no progress and civilization. Such illogical monetary experiments of the Modi government have deadly economic consequences for the people of India, but then Modi government doesn’t care about such things and they are not even capable of foreseeing such consequences. As long as the people of India continue to vote for socialism, politicians won’t stop wrecking their lives. 

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