Rs 2k note exchange: Demonetisation 2.0

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Rs 2k note exchange: Demonetisation 2.0

Thursday, 01 June 2023 | Uttam  Gupta

Rs 2k note exchange: Demonetisation 2.0

Rs 2000 note exchange will not have any impact on black money. It will only help hoarders by exchanging Rs 2000 notes without disclosing their identity

In its decision to withdraw Rs 2000 currency notes from circulation announced on May 19, 2023, the Reserve Bank of India (RBI) has stated that they will continue to be legal tender. The notification issued in this regard states:- “…in pursuance of the “Clean Note Policy” of the RBI it has been decided to withdraw the Rs 2000 denomination banknotes from circulation. The banknotes in Rs 2000 denomination will continue to be legal tender.”

From the above, prima facie one gets a sense that it is not a demonetization exercise as it happened over six years ago when, Prime Minister Narendra Modi declared on November 8, 2016, that Rs 500 and Rs 1000 denomination currency notes won’t be legal tender with immediate effect.

If not demonetization then, what is?

 Is it merely a “Clean Note Policy” - as the RBI puts it? The central banks’ argument runs something like this: high denomination notes such as Rs 2000 is normally avoided for cash transactions. Yet, these had to be brought in following the note ban of 2016 to address the logistics of swapping the mammoth old Rs 500/1000 notes for new currency within a short time frame and thus minimize economic disruption. Nearly 90 per cent of the Rs 2000 notes valued at Rs 673,000 crore at their peak as on March 31, 2018, were issued from November 8, 2016, to March 31, 2017.

The intent was to phase them out after the RBI had pumped in a sufficient stock of lower denomination Rs 500 (albeit new) notes to meet the transactional requirements of the economy. 

Already, the stock of Rs 2000 notes has declined from Rs 673,000 crore representing 37.3 per cent of notes in circulation on March 31, 2018, to Rs 362,000 crore constituting only 10.8 per cent of notes in circulation on March 31, 2023. Further, these being at the end of their estimated lifespan of 4 - 5 years and the stock of Rs 500 denominations adequate to meet the currency requirement of the public, it was logical to completely phase out the Rs 2000 note.

The RBI circular says that beginning May 23, 2023, the public may deposit Rs 2,000 banknotes into their bank accounts and or exchange them with banknotes of other denominations up to a limit of ten notes of Rs 20,000 value ‘at a time’ in banks until September 30, 2023. The facility for the exchange will also be provided at the 19 Regional Offices (ROs) of RBI having Issue Departments.

First, holders of Rs 2000 notes get 131 days to get rid of them which is two-and-a-half times the time given to the holders of Rs 500/1000 notes in 2016 i.e. 52 days to exchange them with the new currency. Second, Rs 2000 notes are only 10.8 per cent of the currency in circulation value-wise (as of March 31, 2023) against old Rs 500/1000 notes being a whopping 86 per cent of the corresponding figure in 2016, this time the load on the system is much less. 

Can we simply treat this as a routine exercise?  

At a fundamental level, the ‘withdrawal’ of the Rs 2000 banknotes - an exercise that the RBI hopes will get consummated on September 30, 2023 - doesn’t gel with its reiteration that these notes will remain legal tender even after September 30. Imagine a scenario whereby all of the Rs 2000 notes come back to the banks by this deadline then, any talk of whether it will remain legal tender is irrelevant. Look at it from another angle. 

If, the intention is to maintain the legal status of the Rs 2000 note even after September 30, 2023, implying that it will continue to be accepted for settlement of payments, then why would holders come forward for exchange or deposit in the bank account? To understand the real intent behind the RBI move, we need to know to what use Rs 2000 notes worth Rs 362,000 crore (as on March 31, 2023) are being put. Do these support legitimate economic activity or people are simply using them to ‘hoard their unaccounted income? It can’t be the former; had it been the case then, given the RBI issuing predominantly Rs 500 notes after March 31, 2017, Rs 2000 notes would have disappeared by now.  

The bulk of these notes are likely held as black money. Daily reports of enforcement agencies raids yielding a mountain of cash from the premises of dubious bureaucrats, politicians, businesspersons and so on confirm this. Unfortunately, the measures outlined in the RBI circular and subsequent clarifications given by the governor and public sector banks (PSBs) such as the State Bank of India (SBI) fail to address this menace. 

The RBI allows a person to exchange Rs 2,000 banknotes with other denominations up to a limit of ten notes of Rs 20,000 value ‘at a time’ in banks. While exchanging he is not required to share his identity. This means he can visit a branch any number of times in a day and increase the value of exchange. By doing say ten trips, he can get rid of Rs 2 lakhs worth of black money in a day. If this is repeated for 131 days, he can dispose of Rs 262 lakh.

Under such an arrangement which doesn’t insist on the identity at the time of exchange, a person holding say Rs 100 crore in Rs 2000 notes as ‘unaccounted cash’ can get this exchanged with smaller denominations of Rs 500/100 notes by hiring a number persons to visit branches of any number of banks and repeat for over 4 months. With anonymity preserved, he could go for a less tedious process. He could simply conspire with the bank manager - under a quid pro quo - to have those Rs 100 crore exchanged. All that the latter needs to do is to show in records multiple entries of Rs 20,000 each.

The circular also allows a person to deposit Rs 2000 notes into his bank account without any limit. For deposits above a specified limit (Rs 10 lakh in a savings account), the bank is required to report to the income tax department. But, the hoarder of black cash won’t take this route when the other option (read: exchange) where he can remain anonymous, is available.

To conclude, far from combating black money, the RBI operation will only help hoarders keep it in a safer zone by exchanging Rs 2000 notes with smaller denomination Rs 500 notes without having to disclose their identity. The RBI/government should go for a course correction. First, it should say upfront that ‘from October 1, 2023, Rs 2000 note won’t be legal tender. Second, for every exchange, the bank should insist on a person’s identity either PAN or Aadhaar. Third, for depositing money in the account, the banks should strictly enforce KYC norms.             

(The writer is a policy analyst)

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