Demonetization and Withdrawal of 2000 Rupee Notes from Circulation: Causes and Effects

It has been almost a little more than six years since the Government demonetized the classic and much beloved 1000 and 500 rupee notes, in an attempt to curb circulation and accumulation of black money in India. Now the ‘2000 ka note’ is en route withdrawal from circulation by the Government. The 2000 rupee note has been withdrawn prior to the upcoming national and five state elections next year, when the circulation of cash reaches record heights. The cause of demonetization itself was to stop circulation of black money. However, reports indicate that about 98% of the demonetized currency returned to banks, amounting to about 15.31 Lakh Crore Rupees out of the 15.44 Lakh Crore Rupees that was demonetized. Either people had found new ways, out of the loopholes in the deposit of demonetized currencies, to deposit most of the money back to the banks or the expected amount of black-money in circulation in India (about 24% as per earlier estimates) was wrong. The Supreme Court of India, in deciding the plea against demonetization argued by the four-time Finance Minister P Chidambaram, ruled that the demonetization of currency notes of denomination of Rs. 500 and Rs. 1000 was valid and satisfies the test of proportionality. Read More: Supreme Court upholds Demonetization: "Satisfies the test of proportionality", says majority However, the Constitution Bench delivered a 4-1 verdict with Justice Nagarathna differing from the majority view. However, the dissenting view was expressed as – “It has also been brought on record that 98% of the value of the demonetised currency notes have been exchanged for banknotes which continue to be legal tender. Also a new series of bank notes for Rs 2000 was released by the bank. This suggests the measure itself may not have been proven to be as effective as it was sought to be.”, taking note of the Centre’s admission of ineffectiveness to the extent intended. Coming to the matter of 2000 rupee notes, the same was introduced to cope with the high needs of the market to have a currency after having lost the top two denominations, the 500 and the 1000 rupee notes. Read More: RBI to withdraw Rs. 2000 Notes From Circulation; Exchange Notes till Sept. 30, 2023 The Reserve Bank of India had stated “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.” Almost 1/4th (10.8%) of the originally printed currency is currently in circulation as compared to the peak circulation of 2000 rupee notes (37.3%) in comparison with other denominations. This resulted in the Reserve Bank of India’s decision to withdraw the 2000 rupee note from circulation, in line with the “clean note policy” of India. It is a policy adopted by RBI to ensure availability of good quality banknotes to the members of the public. The RBI also clarified at this instance that, the banknotes in ₹2000 denomination will continue to be legal tender. Notably, this is not the first time a series of currency notes are withdrawn from circulation. The Reserve Bank of India on January 2022, had advised that after March 31, 2014, it will completely withdraw from circulation all banknotes issued prior to 2005. From April 1, 2014, the public will be required to approach banks for exchanging these notes. Banks will provide exchange facility for these notes until further communication. The Reserve Bank further stated that the public can easily identify the notes to be withdrawn as the notes issued before 2005 do not have on them the year of printing on the reverse side. The Reserve Bank had also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers. From July 01, 2014, however, to exchange more than 10 pieces of 500 and 1000 notes, non-customers will have to furnish proof of identity and residence to the bank branch in which she/he wants to exchange the notes. Read More: RBI Issues Exchange/ Deposit Slip Format of Rs. 2000 notes without ID Proof A similar situation is also to be expected in the recent withdrawal of 2000 rupee notes also. In this case, the withdrawal is not expected to baffle the economy like the demonetisation. However, it is an imminent threat that, the intended effects of demonetization will not be met, due to the withdrawal of the 2000 rupee notes alone. The high denomination 2000 rupee notes can be exchanged without any identity proof at the local banks, in a sense enabling the already remonetized black money (from the old 1000 and 500 rupee notes) to get back into circulation as 500 rupee notes. However, it would not be fair to say that the government has drawn a blank at an issue that has already become academic. On the brighter side, loss of a single note of 500 is only 1/4th as painful as that of a 2000, at least in monetary terms. The motive to forge four 500 rupee notes would also be significantly lesser than that of a single ‘2000 ka note’, demotivating forged currency production. Increase in direct tax collections and higher number of income tax returns being filed in comparison with pre-demonetisation period is also a plus which is said to be an indirect effect of demonetisation. The RBI’s estimated end of lifespan of the notes last printed in 2018-19 are also approaching. However, something resembling the wave of panic that spread through the public past demonetisation can be observed, in a much smaller scale as the government takes steps to withdraw the 2000 ka note from circulation. However, the impact on the economy will be significantly lesser in comparison with demonetisation and the step is also expected to give a boost to online transactions. Needless to say, the local businesses are still unaware of the implications of the withdrawal and many shopkeepers show reluctance to accept 2000 rupees for purchases and payments. It is important that the public know the difference between demonetization and withdrawal from circulation, as financial literacy is unfortunately not yet a part of the school curriculum as of now; in order to allow the government to smoothly phase out the 2000 rupee notes from circulation. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

Demonetization and Withdrawal of 2000 Rupee Notes from Circulation: Causes and Effects

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