A high-value flush out

NEW DELHI: In a bolt from the blue, the Reserve Bank of India (RBI) on May 19 announced the withdrawal of Rs 2,000 currency notes from circulation, but gave the public time till Sept 30 to either deposit such notes in their accounts or exchange them at banks.

The facility for exchange will be available from May 23. Per sources, no requisition slip is required for the exchange of Rs 2,000 notes up to a limit of Rs 20,000 at a time, and no ID proof is required to be submitted by the tenderer at the time of exchange.

It must be noted that the currency will remain legal tender despite the central bank having set a deadline for swapping the notes, at least as of now.

The announcement rekindled memories of confusion that played out following the demonetisation of Rs 500 and Rs 1,000 notes that was affected on Nov 8, 2016.

Back then, the Prime Minister had assured citizens the measure should be viewed as a short term pain for long term gain.

The pain was anything but short, as serpentine queues formed outside banks, with people rushing to exchange their notes, some of them collapsing from exhaustion.

The impact was devastating for the economy as lakhs of small businesses and traders found themselves bereft of the cash flow that kept credit lines alive. India’s real GDP growth dipped in the immediate fourth quarter to 6.3 per cent from 9.1 per cent the previous year. Later, in FY2018, the GDP growth plummeted from 8.3 per cent to 6.8 per cent. The economic output loss in the year after demonetisation was pegged at Rs 2 lakh crore.

Political observers believe that this time around, the struggle will not be as backbreaking, as ordinary citizens have barely had access to Rs 2,000 notes over the past few years.

A reason is that the number of Rs 2,000 notes have depleted over the years, with printing having stopped a few years ago, as the government and RBI had viewed the denomination as a stop-gap arrangement post the note ban.

Even the PM was not keen on introducing these notes, as he didn’t want the poor to be affected.

These notes currently comprise 10.8 pc of currency in circulation (CiC). As digital payments are being used in huge numbers for economic transactions, the role of physical currency notes, especially the Rs 2,000 notes as a medium of exchange has declined significantly.

According to the former chief economic advisor Krishnamurthy Subramanian, the withdrawal would help dig up a significant portion of Rs 3.6 lakh cr of the CiC (1.3% of the GDP) in Rs 2,000 notes currently.

Policy experts believe that the measure could boost banks’ deposit base and liquidity in money markets to the tune of Rs 40,000 cr-Rs 1.1 lakh cr.

This is the case even if just one third of the high value notes are ferreted out by the exercise.

Per QuantEco Research, the unaccounted-for income could possibly fuel demand for high value or conspicuous consumption items including, real estate and precious metals.

Interestingly, digital transactions in the country are set to multiply three times by 2026, which might further accelerate our cashless drive.

Having said that, in a cash-driven economy like ours, where internet penetration is just about 48%, realising the dream of Digital India will need a lot more than knee-jerk exercises involving flushing out of high value notes.