“Those who say demonetization is good in long run should recall the quote: ‘In the long run we are all dead”- Ex-PM Manmohan Singh.
Table of Contents
Demonetization of Pink 2000 legal Tender?
Phasing out the pink ₹2000 legal tender in India: Clean Note Policy and History
Debunking Myths About Pink 2000 Legal Tender Demonetization in India.
Critics on the Demonetization and now Phasing Out of the ₹2000 Note
3 Cash-Dependent Sectors and the Demonetization or Phase-out Effect.
9 Digital Payment Methods: The Transition to a Cashless Economy in India
The Indian Economy Amidst the Phase-Out: Prospects and Challenges
Demonetization of Pink 2000 legal Tender?
On May 19, 2023, the Reserve Bank of India officially announced the phasing out of the ₹2000 legal tender in India. As per the RBI's announcement, these notes will no longer be in circulation post Sept 30th, 2023.
But let's be real, how many of us have ₹2000 legal tender with us now? Most of us do not. At least no one in my known circle has it. I, in fact, tried getting one from a nearby ATM to explore the first-hand experience of it. But I failed to get any ₹2000 notes. To be true, I haven't seen that in months. The flow has already stopped long back once their printing stopped back in 2019.
Fact Check: |
₹2000 legal tender is only ₹2.5 lakh Cr in absolute terms i.e., 10%-12% of the total cash flow currency in India. |
Phasing out the pink ₹2000 legal tender in India: Clean Note Policy and History
The pink ₹2000 legal tender in India, was introduced post the 2016 demonetization drive, has a particularly interesting history. The Reserve Bank of India (RBI) released this highest denomination note as a temporary measure to alleviate the cash crunch following the abrupt withdrawal of ₹500 and ₹1000 notes from circulation. The RBI's objective was clear; to ensure adequate cash flow within the economy, mitigating any immediate disruptions that the demonetization might cause.
While it served its purpose initially, its high value also posed some unique challenges, especially concerning black money and counterfeiting. Thus, the decision to introduce the ₹2000 note was always designed to be a short-term solution.
Indeed, as part of the 'Clean Note Policy', an initiative aimed at maintaining the quality of notes in circulation and minimizing the scope for fraudulent activities, the central bank signaled its intent to gradually reduce the circulation of these high-value notes. Staying true to its word, the RBI started slowing down the printing of the ₹2000 note in 2018, and by 2019, it ceased its production altogether.
The 'Clean Note Policy' is an essential part of the RBI's broader strategy to safeguard the integrity of India's financial system. It involves a series of measures, including regular withdrawal of soiled and mutilated notes, introduction of varnished banknotes, and enhanced security features to prevent counterfeiting. The policy also includes increasing awareness among the public about identifying counterfeit notes.
Phasing out the ₹2000 note by 2023 is a continuation of this policy, a move designed to increase transparency, streamline the currency management system, and ensure better control over the flow of money. It's worth noting that this isn't akin to a demonetization event; it's a gradual, calculated withdrawal aimed at minimizing any potential disruptions to the economy, much like its initial introduction.
7 Cost Considerations: Why Paper legal tender Takes Priority Over Mint
While any legal tender has a designated life span of 45 years. But the coins generally tend to outperform that as history of their existence is still evident with 100 years old coins available till today. But, when it comes to phasing out high-denomination currency like the ₹2000 note, the focus on paper legal tender instead of minted coins is driven by cost considerations and practicality. (RBI)
Understanding the economic factors behind this decision sheds light on the rationale for prioritizing paper currency over coins.
The cost of manufacturing coins by the government is higher than their face value. (inshorts)
The cost of minting a ₹1 coin is ₹1.11, exceeding its own value.
The government spends ₹3.69 and ₹5.54 to manufacture ₹5 and ₹10 coins, respectively, which is notably higher compared to the denominations they represent.
Printing paper currency is a more cost-effective option.
The cost of printing a ₹500 note is ₹2.57, a ₹100 note costs ₹1.51, and a ₹10 note is printed at a cost of ₹1.01.
Carrying and handling coins can be cumbersome during daily transactions, especially in higher denominations.
The convenience factor favors the use of paper notes, which are lighter and easier to manage.
Debunking Myths About Pink 2000 Legal Tender Demonetization in India
In the context of recent developments, it's crucial to debunk a pervasive myth: the misunderstanding of the distinction between 'demonetization' and 'phasing out of currency'. Misconceptions around these terms have fueled baseless rumors about an impending demonetization event, causing unnecessary panic among many citizens.
'Demonetization' and 'phasing out of currency' are two distinct monetary policy actions. Demonetization is a radical and immediate measure wherein a specific currency note's legal tender status is annulled. In essence, demonetization means that the respective currency unit is no longer recognized as a medium of exchange, effectively divorcing the note from its value, as was the case in India in 2016.
Conversely, 'phasing out of currency' is a far more measured and gradual approach. It entails the systematic withdrawal or replacement of a particular denomination over a set period. It is not an abrupt invalidation of the currency's value but a planned reduction of its circulation. Phasing out forms a crucial part of the 'Clean Note Policy', which aims at maintaining the quality of currency notes in circulation and minimizing the scope for fraudulent activities.
In the case of the ₹2000 note, the RBI is not demonetizing but phasing out this denomination. This process began subtly in 2018, with a slowdown in printing, and by 2019, the production of the ₹2000 note had ceased altogether. This strategy aligns with the overall aim of the 'Clean Note Policy' to ensure a transparent and orderly currency system. (Hindu)
The data from the RBI further debunks any rumors of an impending demonetization. Currency in circulation has been increasing from 2014 to 2022, indicating no signs of a sudden invalidation of any legal tender. Additionally, the continued production of other denominations underscores the government's commitment to maintaining sufficient cash flow in the economy.
In essence, the public should understand the significant differences between demonetization and phasing out. The decision to phase out the ₹2000 note is a strategic, gradual process aimed at strengthening India's financial landscape. It is not an abrupt measure like demonetization, nor does it signal the likelihood of such an event in the foreseeable future.
Critics on the Demonetization and now Phasing Out of the ₹2000 Note
The decision to phase out the ₹2000 note has sparked a range of opinions among economists, politicians, and financial experts. As it did during the demobilization back in Nov 2016.
Manmohan Singh expressed concerns about potential disruptions in the aftermath of the 2016 demonetization, which led to a sudden cash shortage and impacted numerous sectors of the economy.(Outlook)
Raghuram Rajan warns about the challenges of reducing cash-dependency in an economy where a significant population still lacks access to digital financial services. His concerns emphasize the need for robust measures to ensure the financial inclusion of all citizens as India transitions towards a digital economy. (Hindu)
George Soros criticized the decision, terming the 2016 demonetization as a "reckless and ill-judged" step that hampered economic growth in India. (sdblognation)
While their explicit comments on the ₹2000 note phase-out, is yet to be interviewed. The opposition in India's democratic system has predictably been critical of this move.
BRS Telangana spokesperson expressed concerns about smaller businesses adapting to the phase-out of the ₹2000 note. (Hindu)
Smaller businesses operate on thin margins and could find it difficult to adapt to the transition, leading to temporary disruptions in their operations.
These criticisms underscore the delicate balance the government and the RBI need to maintain during the phasing out process. The move calls for an inclusive approach that ensures minimal disruption, particularly for cash-dependent sectors and smaller businesses, while simultaneously promoting a transition to digital payment systems.
3 Cash-Dependent Sectors and the Demonetization or Phase-out Effect
The phasing out of the ₹2000 note will inevitably have significant implications for cash-dependent sectors of the Indian economy, such as the agricultural sector, wholesale markets, and various small and medium enterprises (SMEs). These sectors often rely heavily on cash transactions due to their operating environment and the lack of digital infrastructure, especially in smaller cities and rural areas.
The agricultural sector may face difficulties due to cash-based transactions with farmers and laborers. The removal of the ₹2000 note may result in temporary cash crunches and impact daily operations until alternate modes of transactions are established or widely accepted.
Wholesale markets, where cash transactions dominate, might face logistical challenges due to the higher denomination of the ₹2000 note, allowing for easier handling of large sums of money.
Small businesses and SMEs, particularly those in tier-2 and tier-3 cities, might face a steep learning curve in transitioning to a digital economy, particularly for those not yet familiar with digital payment methods.
However, this move could also act as a catalyst for accelerating India's transition towards a digital economy. The drive towards a digital economy, promoted under the "Digital India" initiative, plays a significant role in creating a cleaner and safer financial ecosystem. Initiatives such as Aadhar, Digi locker, and others have been implemented to address concerns related to money laundering, black money, and counterfeit currency. These efforts have proven effective as the currency in circulation has risen from Rs 13 lakh crore in 2014 to Rs 31.33 lakh crore in March 2022. (Fortune India)
In essence, while the impact on cash-dependent sectors cannot be ignored, this move also presents an opportunity for India to make a significant leap towards becoming a digital economy.
"Demonetization Impact: A Personal Anecdote from the 2016 Indian Currency Reform"
As we delve into this topic, I can't help but recall my personal experiences during the demonetization period in 2016. My marriage was scheduled just a month from the demonetization announcement. My family and I had to face immense challenges to arrange the necessary cash, as digital payments were still in their nascent stage and not widely accepted. There was misinformation around surcharges on online payments, and due to apprehensions, many people were wary of using digital platforms. However, since then, the situation has changed dramatically, with a significant shift towards digital payments, largely thanks to the UPI revolution in India.
9 Digital Payment Methods: The Transition to a Cashless Economy in India
India's digital revolution has given rise to an array of digital payment modes, signifying a gradual shift towards a cashless economy. Some of the Digital Payment Systems are as follows: (Source: NPCI)
Unified Payments Interface (UPI) allows instant money transfer via mobile devices round the clock.
BHIM (Bharat Interface for Money) enables UPI-based payments and promotes digital transactions.
Debit and Credit Cards, including RuPay Debit Cards, continue to be popular for both offline and online transactions.
Immediate Payment Service (IMPS) provides an instant, 24/7 interbank electronic fund transfer service.
Aadhaar Enabled Payment System (AePS) and BHIM Aadhaar Pay leverage India's unique biometric identification system to facilitate secure transactions.
Bharat Bill Payment System (BBPS) is a one-stop solution for all bill payments.
NETC FASTag enables automatic toll payments, digitizing yet another aspect of financial transactions.
E-RUPI is a recent addition, acting as a cashless and contactless instrument for digital payments.
The USSD/*99# service caters to those without a smartphone or internet access, allowing them to perform financial transactions through basic feature phones.
Read more about UPI and other digital payment methods at sdblignation.in; UPI: Innovating for Financial Empowerment. |
The Indian Economy Amidst the Phase-Out: Prospects and Challenges
The phasing out of the ₹2000 note is a significant shift in the Indian economic landscape, with repercussions expected to ripple across the agricultural sector and wholesale markets. These sectors predominantly operate on cash transactions, and the decision may stimulate a push towards the government's 'Digital India' initiative.
However, the real question is the readiness of these sectors for a digital shift and the impact on the common man, who is more attuned to a cash-based economy. Hence, while the move aligns with the country's digitization drive, it's imperative that the transition be made smoothly, taking into account the varying levels of digital literacy across the nation.
RBI and Government Initiative for a Smooth Transition: The Road Ahead
To facilitate this transition, the RBI and Government have taken several initiatives: (Source: Indian Express)
Exchange of ₹2000 notes up to ₹20,000 requires no requisition slip or identity proof, making the process more accessible.
Insurance premiums are payable with ₹2000 notes, providing continuity to regular financial activities.
The ₹2000 banknote maintains its legal tender status, signifying the notes can be used for transactions and also received as payment.
The public is encouraged to deposit and/or exchange these banknotes on or before September 30, 2023, offering flexibility in the transition.
Deposit and exchange facilities for the ₹2000 banknotes are available at all banks until September 30, 2023.
Exchange facility is also available at the 19 Regional Offices (ROs) of RBI with issue Departments until September 30, 2023.
Beyond the September 30 deadline, individuals can go to RBI centres and exchange the notes, ensuring no one is left with unusable currency.
Conclusion
The government's decision to phase out the ₹2000 note stems from a drive to enhance economic transparency, eliminate black money, and tackle counterfeiting. While the transition might pose short-term challenges, it also opens up opportunities for a more digital and inclusive Indian economy.
Do you have an anecdote or insight to share about how this transition impacts you? As do I Join the conversation on our social media platforms and follow us @sdblognation.in for more articles on current economic and political issues.
Reference List
1) RBI: Press release on "Clean Note Policy".
2) Inshorts: For the cost of manufacturing mints vs paper tender.
3) Hindu: RBI clearing its stand on phasing out 2000 legal tender.
4) Outlook: Ex-PM Singh reaction on demonetization back in 2018.
5) Hindu: Ex-RBI governor Raghu Ram reaction on demonetization.
6) Hindu: BSR, Telangana spokesperson comment on phasing out 2000 legal tender.
7) Fortune India: On the growth of cash flow circulation in India post 2016 demonetization.
8) NPCI: Different digital payment methods available in India.
9) Sdblognation: Reference for the article; UPI: Innovation for Financial Empowerment.
10) Indian Express: The Steps suggested by govt and RBI on smooth exchange of 2000 legal tender.
Though the phasing out of Rs 2000 is not demonising,but somewhat it will effect us directly or indirectly
Demonetization is helpful to prevent money hoarding and money laundering. But the cost of it has be to bear by the middle class tax payers..
The phasing out of 2000 legal tender is not demonetisation but it will effects us directly or indirectly. Where as the cash flow of small and micro business will have sure direct effect.
I'm saying from my personal experience as a banker.