‘Will not inconvenience common people’: Former CEA endorses RBI decision to scrap Rs 2,000 notes

The Reserve Bank of India (RBI) took the nation by surprise on Friday night when it announced the withdrawal of the Rs 2,000 denomination after September 30. While this decision has faced criticism from opposition parties, the ruling Bharatiya Janata Party (BJP)-led central government has staunchly supported the move. Amid the ongoing political debate surrounding the withdrawal of Rs 2,000 notes from the Indian market, Dr Krishnamurthy Subramanian, the former Chief Economic Advisor, has provided six reasons why he believes the move is beneficial for India.

According to Dr Subramanian, the withdrawal of Rs 2,000 notes will have overall positive effects. Here are the key points highlighted by the former Chief Economic Advisor:

Curbing Cash Hoarding: Dr Subramanian asserts that withdrawing the Rs 2,000 denomination will help uncover a substantial portion of the Rs 3.6 lakh crores of Currency In Circulation (CiC) currently in Rs 2,000 notes. Various raids have uncovered vast amounts of hoarded cash stored in Rs 2,000 notes. These instances of cash hoarding primarily involve Rs 2,000 notes, as their usage for legitimate transactions has significantly declined. Dr Subramanian references the 80-20 rule, suggesting that while 80 per cent of people may legitimately store money in Rs 2,000 notes, they likely account for only 20 per cent of the overall value. On the other hand, the remaining 20 per cent of individuals using Rs 2,000 notes are likely hoarders who may account for 80 per cent of the value (approximately Rs 3 lakh crores).

Decline in Usage: The role of physical currency notes, particularly Rs 2,000 notes, has diminished due to the increasing prevalence of digital payments.

Substitution with Rs 500 Notes: Dr Subramanian proposes that Rs 500 notes, combined with digital transactions, can seamlessly replace the minimal usage of Rs 2,000 notes as a medium of exchange.

Digital Transaction Growth: Dr Subramanian cites a report by the Boston Consulting Group (BCG) suggesting that digital transactions are expected to triple by 2026. This projection further reduces the need for Rs 2,000 notes as a medium of exchange in the coming years.

Continuity of Legal Tender: Dr Subramanian emphasises that the RBI has stated that the ₹2,000 note will continue to be considered legal tender even beyond September 30, 2023. Therefore, individuals holding genuine Rs 2,000 notes can still exchange them after the specified deadline.

The RBI has allowed the public to exchange their Rs 2,000 notes at banks until September 30. However, the central bank has not commented on the status of Rs 2,000 notes held by private individuals after this deadline.

The Rs 2,000 denomination was introduced after the Indian government banned Rs 500 and Rs 1,000 currency notes in 2016. The government reintroduced Rs 500 notes with a new design for daily transactions and also introduced Rs 2,000 notes. The RBI ceased printing Rs 2,000 notes in 2018-19, and subsequently, these notes were reduced in circulation.

As of March 31, 2018, the total value of Rs 2,000 banknotes in circulation reached Rs 6.73 lakh crore, constituting 37.3 per cent of all notes in circulation. However, by March 31, 2023, the value of Rs 2,000 notes had declined to Rs 3.62 lakh crore, accounting for only 10.8 per cent of the total notes in circulation.