And here we go again.
In a sudden decision, the RBI on 19 May announced a withdrawal of its 2000 rupee note from circulation with immediate effect. The denomination will continue to remain a legal tender, which means that one can change it to any other currency denomination at a bank, or even make deposits using the same up until 30 September.
However, the RBI has also asked all citizens to exchange their 2000 rupee notes before 30 September.
The exchange can be made up to a limit of 20,000 rupees at a time at any bank starting 23 May.
Why Has the RBI Decided to Do This?
It says that “the objective of introducing 2000 rupee notes was met once banknotes in other denominations became available in other quantities.”
It also stated that "the total value of the 2000 rupee notes in circulation has declined from Rs 6.73 lakh crore at its peak of 31 March 2018 to Rs 3.62 lakh crore on 31 March 2023.
Presently, 2000 rupee notes constitute only 10.8% of the total cash in circulation.
Now, while the RBI has said that the note will remain legal tender until 30 September, it is yet to clarify what will happen after that deadline.
Are People Going to Suffer?
Going beyond all the confusion, there are some key questions on everyone's mind. Firstly, are people going to suffer losses?
The 2000 rupee notes form a small part of the currency in circulation and are not widely used for day-to-day transactions. Moreover, a lot of payments have shifted to digital modes in the last five-six years in India.
Is this move going to affect the economy or the GDP? Also unlikely. These notes are likely to be replaced by other denominations, and will not affect the total currency in circulation and therefore will have no monetary effect.
As former Economic Affairs Secretary and former Finance Secretary Subhash Garg, says, "The withdrawal of the notes from circulation is a non-event and merely the formal completion of the phasing out of an inappropriate denomination note."
But there are some concerns. What if a person or a business firm that operates largely on cash-based reserves has lakhs of 2,000 rupees-based currency reserves? As economist Deepanshu Mohan points out, that firm or individual will now have around 130 days or so to make many daily visits to a bank just to change or deposit these notes.
He asks that in a ‘jobless-poor investment’ growth trajectory, how does the timing of this policy appeal to sound economic policy or thinking?
Too Much Spontaneity?
Additionally, what is up with the spontaneity? Could the government have not thought about how this announcement might stress people out?
They did the same thing with credit cards, with the Union Finance Ministry announcing a 20% TCS charge for all international credit transactions abroad from 1 July.
And after quite some uproar, the Central government promptly announced that to “avoid any procedural ambiguity", any payments made by an individual using their international cards up to 7 lakhs are exempted.
All of this reinforces what many, like Deepanshu Mohan, have been saying about this government for a while: that it practices centralized, consequentially-insensitive, ad-hoc, knee-jerk policies and laws, without making any efforts to consult or seek advice from experts.