Lessons from 2016 demonetisation

Source: The post is based on the article “Lessons from 2016 demonetisation” published in Business Standard on 11^th October 2023.

Syllabus: GS 3 – Indian Economy – Money & Banking

Relevance: reasons behind the success of the withdrawal of 2,000-rupee currency notes.

News: The Reserve Bank of India (RBI) announced to withdrew all 2,000-rupee currency notes in May 2023, reminding people of the 2016 demonetization. Last week, the withdrawal deadline passed, and the operation was much smoother than the 2016 one.

What is the current situation regarding the deposit of 2,000-rupee notes?

Over 96% of the 2,000 denomination notes have been either exchanged or deposited, with over 87% being deposited and not exchanged.

There were also no long queues or significant disruptions like 2016 demonetization.

What factors contributed to the successful withdrawal of all 2,000 denomination currency notes?

Legal Tender Status: In 2016, the 500 and 1,000 denomination notes were declared no longer legal tender overnight. However, in 2023, the 2,000 denomination notes remained legal tender even after the withdrawal deadline ended. This caused less panic among the people.

Size of Withdrawal: The 2016 demonetization was much larger in scale than the 2023 one. In 2016, over 86% of the currency with the public was withdrawn, while in 2023, only less than 11% had to be exchanged or deposited.

Communication: Clear and transparent communication was key to the success of the 2023 currency withdrawal. The RBI and commercial banks worked together effectively to ensure the smooth implementation of the policy.

According to the RBI, the decision to withdraw 2000-rupee notes was part of the “Clean Note Policy,” as they had reached the end of their expected lifespan.

In contrast, the 2016 demonetization suffered from poor communication, which led to confusion and worry.

Freedom to use the old notes: In 2016, there were restrictions on using the old notes, which was not the case in 2023 with the 2,000 denomination notes.

Time Period: The 140-day exchange window in 2023 helped to reduce panic, unlike the 2016 demonetization, when people only had 52 days to exchange their 500 and 1,000-rupee notes.

Additionally, in 2023, banks had to deal with just 1.78 billion notes over 140 days, a much smaller task than managing 21 billion notes in 52 days during the 2016 demonetization.

Unified Payments Interface (UPI): The success of the 2023 currency withdrawal can also be attributed to the rapid expansion of the digital payment network, UPI, in recent years.

This expansion accelerated the process of withdrawing 2,000 denomination currency notes much smoother and reduced potential disruptions in the withdrawal.

Must Read: Withdrawal of currencies: need and challenges – Explained

What is the way ahead?

The RBI applied lessons learned from the 2016 demonetization in the 2023 withdrawal of 2,000 notes, contributing to its successful execution.