On May 19, the Reserve Bank of India announced that it was pulling out of circulation the country’s highest denomination currency, the 2,000 rupee note (worth $24.27 at today’s exchange rate).
Unlike in 2016, when the government announced the demonetization of the 500- and 1,000-rupee currency notes, this time there was neither a speech nor a statement from Prime Minister Narendra Modi or any other minister or government official. The RBI made its announcement on May 19 in a written statement.
The 2,000-rupee note has had a short life. It was introduced in 2016 after the Modi government withdrew 500- and 1,000-rupee notes.
Although the 2,000-rupee note is being removed from circulation, it will remain legal tender. While the RBI has called on the public to exchange/deposit these notes in banks by September 30, people can continue to transact in these notes even after the deadline. However, banks will stop issuing new 2,000-rupee notes.
Although the process of withdrawal of the 2,000-rupee note is gradual, the RBI announcement triggered panic and resulted in thousands queuing up outside banks to exchange the notes. No doubt, the RBI announcement triggered memories of the 2016 demonetization of currency.
Few Indians will have forgotten the night of November 8, 2016, when Modi in a televised speech announced the decision to withdraw all currency notes of 500- and 1,000-rupee denominations from circulation. He laid out the reasons for the sudden move rather dramatically.
“Terrorism is a frightening threat. So many have lost their lives because of it,” he said. “But have you ever thought about how these terrorists get their money?”
“Enemies from across the border [Pakistan] run their operations using fake currency notes. This has been going on for years. Many times, those using fake five hundred and thousand rupee notes have been caught and many such notes have been seized,” Modi said.
The demonetization decision was also aimed at flushing out “black money” i.e., unaccounted money that is hoarded in the form of high-denomination notes, the Modi government claimed.
“The five hundred- and thousand-rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper,” Modi said in his speech, inviting the people “to make your contribution to this grand sacrifice for cleansing our country.”
Modi also claimed that demonetization was a push towards a cashless or digital economy.
The 2,000-rupee note was born to symbolize Modi’s crusade against terror and “black money.” The decision was hailed by the BJP and its supporters as a masterstroke by Modi.
With the two highest-value denominations rendered useless, as much as 86 percent of the total currency notes in circulation at that time were pulled out literally overnight. They could only be exchanged at banks while presenting valid proof of identity.
But soon, when visuals of serpentine queues outside banks and incidents of stampedes started flooding media and social media platforms, pro-government media houses and journalists, including top television anchors Sudhir Chaudhary and Sweta Singh, started reporting that the new 2,000 rupee note would have in-built nano-GPS microchips to enable their tracking by the government, a claim that the RBI subsequently rubbished.
Many opposition parties slammed Modi for landing the people in unfathomable trouble with his whims and irrational decisions. They alleged that the move had a hidden agenda. Congress leader Rahul Gandhi, for instance, alleged that the move was aimed at “deliberately harming India’s informal sector which survives on liquid cash” and passing “on the gains to a handful of big corporates.”
So, did the Modi government achieve its three declared objectives of unearthing unaccounted money, hurting terror funding by eliminating counterfeit currency notes, and reducing cash-based transactions, with the demonetization exercise?
A little over a week after the demonetization announcement, Attorney-General Mukul Rohtagi told the Supreme Court that the government estimated that 3 to 4 trillion rupees ($36.46 billion–$48.62 billion) – or, 17-23 percent of the Rs 17 trillion ($206.62 billion) in circulation – would not return to the system, as it was “black money.”
“If Rs. 3 to 4 trillion is not deposited, it is a straight write-off viz. the debt of the government of India,” he had said.
However, 99 percent of the demonetized currency in circulation came back to the banks by June 2017. Even more was exchanged thereafter. Contrary to the Modi government’s calculations, hoarders of “black money” had managed to turn it “white.”
As for fake currency of 2,000 rupee denomination face value, these notes started entering the market as early as February 2017. By 2019, of all fake currency notes recovered, those of 2,000 rupee denomination were the highest in number. This showed the ineffectiveness of demonetization in ending, or even jolting, the fake currency network, as supplies mimicking the new set of currencies spread to different parts of the country in a matter of a year.
As for accelerating the digital economy, the unavailability of cash did, indeed, force a section of the people to transact digitally. However, Finance Minister Nirmala Sitharaman told Parliament last year that there has been a 30 percent increase in the volume of notes in circulation since the 2016 note ban. By value, it was double that in the pre-demonetization period.
There were heavy costs to the 2016 demonetization decision too. Dozens of people died in the mad rush to get their currency notes exchanged. It cost the state exchequer an additional $485.8 million for printing new notes.
In 2016, the Mumbai-based economic think tank Centre for Monitoring Indian Economy estimated that the demonetization exercise cost RBI and the Indian exchequer $2.03 billion. Additionally, it harmed economic growth and jolted the micro, small and medium enterprises (MSME) sector, causing the loss of an estimated 5 million jobs.
Despite the failure of the demonetization exercise and the heavy costs it inflicted, the move survived judicial scrutiny. In 2023, while upholding demonetization as a legitimate move, the Supreme Court held that “merely because some citizens have suffered through hardships would not be a ground to hold the impugned notification to be bad in law” and emphasized that “every noble cause claims its martyr.”
So, what impact will the recent decision to withdraw 2,000-rupee notes have on the Indian economy?
In spite of the initial panic, that the announcement generated, the withdrawal of the 2,000 rupee note is unlikely to lead to the kind of hardship and harassment that was associated with the 2016 demonetization. Then, 86 percent of currency notes were frozen. But the share of 2,000-rupee notes currently in circulation is only 10.8 percent of all Indian currency notes in circulation. What is more, the 2,000-rupee note will remain legal tender.
However, as in response to the 2016 demonetization, the latest move is expected to shoot up bank deposits, at least till September, as those who have 2,000 rupee notes with them are likely to mostly deposit them in banks. Even if a section of the deposits in 2,000 rupee notes are withdrawn in smaller currencies, another section is expected to remain in the banking system for a longer period, increasing liquidity inflow, which may in turn impact lending and investment policies. It may also increase high-value spending, such as on jewelry, land or real estate.
Nevertheless, experts are pointing out that the impact, negative or positive, would be marginal and short-lived. This is because the 2,000-rupee notes had already started disappearing from the market, as its printing was stopped in 2018.
The death of the 2,000-rupee note was coming. People had become used to a life without 2,000-rupee notes. It will not be missed.