Rs 2,000 Notes: Action Replay of Demonetisation of 2016

On May 19, 2023, the Reserve Bank of India (RBI), while announcing the withdrawal of Rs 2,000 currency notes from circulation with immediate effect, declared that the validity of the notes as legal tender will remain intact till September 30. This means that those high-valued notes can be deposited in banks, exchanged with other notes or used for buying goods and services till that deadline.

Demonetisation of 2016 and its Devastating Impact

Such a sudden decision by RBI is nothing but a kind of replay of the abrupt demonetisation of Rs1,000 and Rs 500 notes announced by Prime Minister Narendra Modi on national television on the evening of November 8, 2016 to, in his words, “firmly deal” with several problems including that of black money plaguing the economy and society. 

It was widely held then that Modi announced demonetisation without much consultation and deliberation with the government’s own bodies such as the Central Board of Direct Taxes and other experts who possibly would have flagged its serious implications on the economy, particularly on the cash- driven informal sector and large segments of the micro, small and medium enterprises (MSMEs).

In fact, the Indian economy and economies of several sectors and households were severely impacted by the sudden demonetisation, and even several government reports testified this. Characterising November 8, 2016 as a "black day" for our economy as well as democracy, former Prime Minister Manmohan Singh stated in the Rajya Sabha that demonetisation was "organised loot and legalised plunder".

SC Held DeMo as Lawful in 4-1 Majority Verdict

In January this year, the Supreme Court, by 4:1 majority, held that the demonetisation process of 2016 was lawful with the dissenting judgement delivered by Justice B V Nagarathna, who held it as illegal. She observed that   "...there was no application of mind by the Reserve Bank" and noted that, "Neither was there any time for the bank to apply its mind to such a serious issue". She then stated, "This observation is being made having regard to the fact that the entire exercise of demonetisation of all series of bank notes of Rs.500/- and Rs.1000/- was carried out in twenty four hours" and "...the action of demonetisation of all currency notes of Rs.500/- and Rs.1000/- is vitiated."

DeMo Did Not Remedy Black Money Problem

It should be borne in mind that after the demonetisation of Rs.1,000 and Rs.500 notes, new notes including Rs.2,000 notes, were printed and circulated. Many experts were perplexed by the Modi government’s decision to print currency notes of Rs.2,000 denomination when Rs.1,000/- and Rs.500/- notes were withdrawn to deal with the scourge of mounting black money. Because, high-valued currency notes like Rs. 2,000 could be easily used to accumulate black money which can be traced to several other sources, including real estate or those who have enormous amounts of gold and other ornaments.

Read Also: Demonetisation Failed: The Emperor is Naked

It is now well documented that the problem of black money could not be remedied even marginally by demonetisation because 99.9% of Rs.1,000 and Rs.500 notes were deposited by people in banks following demonetisation in November 2016.

Demonetisation and Possible Electoral Motive

So, like the withdrawal of Rs.500 and Rs.1,000 notes in November 2016, now the withdrawal of Rs.2,000 notes by RBI in an abrupt manner is being looked at with scepticism. Several experts had pointed out that the decision for demonetisation was taken in November 2016 with an eye on the Assembly elections scheduled to be held in Uttar Pradesh in 2017. Similarly, they are now saying that the sudden withdrawal of Rs.2,000 notes by RBI and its announcement that the legal tender of those notes would be valid until September 30, should be seen in the context of Assembly elections to be held in two months in Madhya Pradesh, Chhattisgarh, Rajasthan and Telangana.

This time round, too, it is apprehended that the announcement might have been done based on electoral or political designs.

RBI's Explanation Lacks Conviction

The ostensible objective of first introducing Rs.2,000 notes and then withdrawing these can be discerned from the RBI notification. It says, “The total value of these banknotes in circulation has declined from Rs.6.73 lakh crore at its peak as on March 31, 2018 (37.3 % of notes in circulation) to Rs.3.62 lakh crore constituting only 10.8% of notes in circulation on March 31, 2023,” It added that “the objective of introducing Rs 2000 notes were also met once banknotes in other denominations became available in other quantities.”

The explanation given by the RBI that the "...objective of introducing Rs 2000 notes were also met once banknotes in other denominations became available in other quantities” does not sound convincing. It is only hoped that the withdrawal of such high valued notes, to use Justice Nagarathna's words, is not "vitiated."

Those who have lakhs and crores of rupees in several thousands of Rs.2,000 notes would have to make several rounds of banks for exchanging these. It is quite possible that the Central agencies might put those people or political parties under the scanner and even book them under several charges.

Given the fact that elections are far off, after September 30, attempts would be made to apply coercive measures against such people so that their electoral prospects are vitiated. We will have to wait and see how this replay of the earlier demonetisation process really plays out this time round.

The writer served as Officer on Special Duty to Former President of India K R Narayanan. The views are personal.