India Braces For Impact As Withdrawal Of ₹2,000 Notes Confirmed

May 25, 2023
The Reserve Bank of India has confirmed that ₹2,000 banknotes are soon to be withdrawn, raising fears of cash shortages that crippled the country in 2016 during a similar "demonetisation" policy.

The Reserve Bank of India (RBI) has confirmed that ₹2,000 banknotes are soon to be withdrawn, raising fears of cash shortages that crippled the country in 2016 during a similar "demonetisation" policy.

As of September 30 this year, the RBI has confirmed that Mahatma Gandhi (New) Series ₹2,000 ($24) banknotes will be withdrawn from circulation but will continue as legal tender.

In an effort to boost digital payments, formalise the economy and remove worn-out notes from circulation, the RBI has said the time is right to phase out the ₹2,000 banknote.

In a statement, the RBI said the new series ₹2,000 note has been in circulation since 2016, when it was introduced to compensate for the withdrawal of old series ₹500 and ₹1,000 notes.

Almost all the new series ₹2,000 notes were issued before March 2017, meaning that they have now outlived the RBI’s expected “lifespan” of a paper banknote (which is typically four to five years).

In addition to the RBI’s "Clean Note Policy", the central bank has said its decision was driven by other economic and monetary factors.

As the RBI explained, the ₹2,000 note is “not commonly used” for transactions, and the bank claims there are “adequate” quantities of smaller notes in circulation to meet the public’s needs.

As a percentage of all notes in circulation, the share of the ₹2,000 note peaked in 2018 at 37 percent. Since then, the note has been in decline, with its share of the total notes in circulation having fallen to 10 percent this year.

The RBI has ordered all bearers of ₹2,000 notes to deposit or exchange them at a bank by September 30.

Banks have also been ordered to expand their cash services so that Indians can deposit or exchange these notes in larger quantities.

Starting from Tuesday (May 23), Indians can deposit or exchange up to ₹20,000 ($240) of these notes per bank visit.

The RBI has also opened up 19 of its regional offices to act as exchange locations and, in the meantime, banks must stop issuing ₹2,000 notes to customers with immediate effect.

Echoes of 2016 “demonetisation”

For Indians who remember the government’s decision to withdraw old series ₹500 and ₹1,000 banknotes in 2016, the withdrawal of the ₹2,000 note carries some bad omens.

The 2016 policy, in the early years of Prime Minister Narendra Modi’s first term, was intended to reduce the country’s informal or "black" economy, reduce counterfeit notes and increase tax receipts.

It was also intended to lay the groundwork for adoption of the Unified Payments Interface (UPI), India’s instant payments system, that launched in 2016.

UPI went live several months before demonetisation, which alongside the policy, provided a major catalyst to India’s payment firms and fintech industry.

As demonetisation kicked in, Indian consumers rushed to open up new mobile wallets, with one particular beneficiary being Paytm.

Previously, Paytm was the most-used app for UPI payments, although it has since lost its top spot to PhonePe and Google Pay respectively as the market has matured.

UPI growth exploded in 2017 and has never looked back. Between 2017 and 2022, the total number of UPI payments increased from 418m to 75bn per annum.

In 2016, prior to demonetisation, the ₹500 and ₹1,000 notes made up about 86 percent of India’s total cash in circulation, so their withdrawal led to cash shortages and had a significant economic impact.

Protests, strikes and litigation continued for weeks after the policy was implemented and the exchange deadline beckoned, as did the long queues outside banks and ATMs.

At least 25 deaths were reported in the news at the time, due to a mixture of crowd crushes, inability to pay for medical treatment, and shock and suicide after missing the exchange deadline.

As Charu Zelawat, an Indian PhD researcher based in the UK, said: “When the RBI decides to recall the ₹2,000 note, the effects of demonetisation returned to haunt the nation.

“The 2016 demonetisation had such a profound impact on the population as a whole that any action by the central bank to recall notes will unavoidably bring back memories of that incident.”

But speaking to India’s Business Today, RBI governor Shaktikanta Das assured Indians that the impact of the ₹2,000 note withdrawal will not lead to a repeat of 2016.

“The economic impact will be very marginal,” he said. “We have done some informal surveys in various locations in India, and we have found that ₹2,000 rupee notes are hardly used for transactions. So therefore, economic activity will not be impacted.”

Vipul Trivedi, CEO at UK-based Vtrade Capital Investment, said the RBI’s latest cash withdrawal policy should be welcomed as a further step towards formalising the economy.

“To increase tax collection, discouraging cash transactions and promoting digital payments is key,” he said.

“Removing the highest currency note forces individuals to use smaller denominations, making it harder to evade taxes.

“By encouraging transparency and embracing digital payment methods, sectors like real estate can be brought under the tax net, ensuring comprehensive collection for economic growth.”

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