The withdrawal of Rs.2,000/- announced by the RBI on May 20, 2023 is a very good step to continue efforts to curb corruption. The Government and the RBI need to be congratulated for focus on eradicating corruption from the country. Earlier in 2016, when the initiatives to demonetise two notes, Rs.500/- and Rs.1,000/-, were taken, the focus was on corruption, money laundering and terrorist activities. The details of the then initiative and its implications on India are as follows: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3151238

In India, tax to GDP ratio continues to be low at 17%, while in most countries of the world, it ranges above 30% and in some countries above 40% of tax to GDP. As analysed in the above IIMB Working Paper, especially on pages 10 and 11, India is generally not a tax compliant society. There have been estimates of the unaccounted economy since the 1960s and though various initiatives were undertaken, these were not successful.

The Rs.2,000/- denominated note was introduced in 2016 and by March 2017, these notes accounted for 50.4% of the total money in circulation. In March 2018, the value of Rs.2,000 Note in circulation was 37.3%, which has been declining over the period and, was 10.8% by March 31, 2023 with the total value of Rs.2,000/- notes at Rs.3.62 lakh crore.

The total number of pieces of Rs.2,000/- denominated notes as on March 31, 2023, are 18,450 lakh as compared to 33,630 lakh as on March 31, 2018. The number and share of value of Rs.2,000/- denomination to total of currency notes have, therefore, declined over the years (Table 1). However, the share of Rs 500 denominated note is rising rapidly from 42.9% in March 2018 to 73.3 % in March 2022.

Table 1: Banknotes in Circulation

As Rs 2000 note was introduced for quick remonetisation, its purpose was already achieved by March 2018. Thus, the indent and supply of Rs.2,000/- note has been discontinued since 2018 (Table 2).

Table 2: Indent and Supply of Banknotes (pieces in Lakh)

The disposal of soiled Rs.2,000/- notes have been rather small from 1,768 lakh pieces in 2020 to 3,847 lakh pieces in 21-22 (Table 3). This implies that while Rs 2000 note is being pumped in the system, its circulation and usage is minimum, and that it settles down somewhere in the economy as like other notes, it does not exit circulation.

Table 3: Disposal of Soiled Banknotes (pieces in Lakh)

The counterfeit notes detected for Rs.2,000/- note increased to 13,604 pieces in 2021-22 from 17,929 pieces in 2017-18 (Table 4).

Table 4: Counterfeit Notes Detected (number of pieces)

Was Rs 2000 note most Popular?

The Reserve Bank of India undertook a survey and found that Rs.2000 note was least popular (Box 1)

Box 1: Banknote Survey of Consumers: Major Findings

A diverse sample of 11,000 respondents from rural, semi-urban, urban and metropolitan areas, spanning 28 states and three union territories participated in the survey. The survey also included 351 visually impaired respondents (VIR). The survey covered respondents from the age of 18 to 79 years with a gender representation of 60:40 for males and females.

The survey findings revealed that, among banknotes, ₹100 was the most preferred while ₹2000 was the least preferred denomination. Among coins, denomination of ₹5 was the most preferred whereas ₹1 was the least preferred. Watermark of Mahatma Gandhi’s image followed by windowed security thread were the most recognised security feature. Around three per cent of the respondents were not aware of any banknote security feature. Overall, approximately 7 out of 10 respondents were found to be satisfied with the new series of banknotes. Among the VIR, majority were found to be aware of the quality of paper and size of the banknotes.

Source: RBI.

Not the first time of withdrawal of currency notes!

In 2013, the RBI had launched a scheme to withdraw notes that were printed before 2005, lacking sophisticated security features. The withdrawal was smooth and accomplished successfully without any major challenges (Chapter: Currency Management, Annual Report 2013-2014, , RBI, September 2014)

Impact on the Economy

The withdrawal of Rs.2,000/- note from circulation should not generally have any impact on the economy as the percentage of currency notes of Rs.2,000/- is just about 11% of the total money in circulation unlike the demonetisation of Nov 2016 when nearly 86% of the currency in circulation was impacted. As the volume of the notes is not very large in terms of about 18450 lakh pieces, the withdrawal at various banks across the country permitted until September 30, 2023, should not pose a major logistic problem. The Government and the RBI have permitted exchange of 10 notes per person in a seamless manner. Further, Rs.2,000/- note is a high value denomination and generally not used by common man. Also, as the production of Rs.2,000/- note was discontinued in 2018, and was not easily available in ATMs, is generally not part of the wallet of a common man. Thus, consumption and investment in the economy should not decline on account of this withdrawal and therefore the stock market should not be impacted. The sentiments, domestically and globally, would be that the RBI under currency management is pursuing a clean note policy.

As growth should not be impacted so also employment will continue on its normal trajectory. The banking system in the country is robust with adequate capital ratios and built up of buffers amidst solid high profits in 2022-23.

As seen from the data above, very few soiled notes of Rs.2,000/- denomination are returned to the Reserve Bank which implies that the money is perched somewhere and not circulating. There is a possibility that the Rs.2,000/- note has been used for hoarding or collected for high value cash transactions. There is a possibility that some impact may be noted in the housing sector as also real estate, tourism, automobiles, gold and land markets, where cash transactions can take place. On deeper analysis, should this impact the economy? The specific impact analysis would depend on who is holding these notes. In general, housing markets and automobiles are increasingly in the formal sector so impact would not be significant. There is a possibility that small builders in small cities could get impacted but that should not spill over in major cities. Tourism, especially domestic tourism could get impacted initially but given the wide window for exchange offer until September 30, 2023, may not sustain over a long period. Gold prices are generally in tandem with international prices and this small withdrawal in a phased manner is not expected to make a major dent.

In view of the availability of digital banking in terms of UPI/internet banking, the need for cash, especially for transaction purposes in high denominations notes, is not necessary. In India, the spread of the digital payment mechanism has been extensive where small businesses including local carts have the provision for UPI payments. In such circumstances, most citizens use digital payment mechanism and need for cash is minimum. Also, in post - Covid era, concerns regarding the spread of disease through the use of currency notes has also been rising, which has encouraged people to go for electronic settlement of transactions.

Way Forward:

In view of the extensive usage and availability of digital banking mechanisms, the Government may also like to consider withdrawal of Rs.500/- denomination notes though in a slow and phased manner. This will encourage the general public to shift to electronic banking which is safer, at the earliest. Finally, it is expected that the Government's efforts to curtail corruption which distorts productive priorities in the country will be successful with the exercise of withdrawal of Rs.2,000/- note. The strong resolve that the Government is demonstrating, despite 2024 being an election year, in fighting corruption deserves to be appreciated.

References:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3151238