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In a decision that echoes the decree of November 8, 2016, issued Reserve Bank of India announced on Friday Withdraw a denomination of 2000 rupees from circulation. There are two notable de-trading departures in 2016. One, these notes will remain legal tender. And secondly, people were allowed a grace period of four months ending on September 30 to deposit or redeem the 2,000-rupee note. So, technically, this might not count as demonization — there’s a bit of clarity, too, about the status of these notes on October 1. But this decision only reinforces the view that the introduction of the 2,000-rupee note directly contradicts the allegations made at the time the government spent demonetizing the 500-rupee and 1,000-rupee notes was a well-thought-out, effective and enduring strike against black money.
From a practical perspective, Friday’s decision seems superfluous. According to the annual report of the Reserve Bank of India, no new 2,000 rupee notes have been made available by printing presses in the past few years. And since the disposal of dirty banknotes has been steadily increasing, this note has actually lost its share in the larger economy. In 2019, the 2,000 rupee note accounted for 31.2 percent of the value of all banknotes in circulation. By 2022, it will be down to 13.8 percent. By the end of March 2023, it had fallen further. This meant that over time the share of this high-denomination coin would have declined further, and as the number of dirty banknotes rose, it could have been phased out of circulation without disrupting the system and upsetting the public. The Reserve Bank of India, in its wisdom, has stipulated that the exchange of 2,000 rupee notes cannot exceed 20,000 rupees at one time – and we hope it has made provisions for lower denomination notes in banks for exchange. There may be a pattern here of disruptive policy moves that raise concerns about transparency and costs that outweigh the supposed benefits. The recent decision to include international credit card transactions under the liberalized transfer system, attracting a higher rate than taxes collected at source, fits this pattern.
Such decisions raise more questions than answers and shine an uncomfortable spotlight on policymaking in the world’s fifth-largest economy. In 2016, the Prime Minister announced the abolition of coinage. On Friday, it was the Reserve Bank of India that sent the decision. Both the government and the Reserve Bank of India must address concerns that, after six and a half years, few lessons have been learned.
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