| Introduction: Briefly describe the decision to withdraw currency. Body: Give careful analysis on impact of decision and steps that could be taken to execute this decision. Conclusion: Conclude the answer taking into account informal sector. |
Recently, RBI announced that Rs. 2000 currency note would be withdrawn from the market and asked banks to stop issuing the same with immediate effect. It was in the wake of demonetisation in 2016 that the note was introduced as it was felt to infuse liquidity in the economy till other currency notes became available. Rbi has allowed citizens to exchange or deposit the Rs 2000 note till September 30, 2023.
Impact of Withdrawal of Currency Notes on India’s Economy
- Minimal impact: Economists predict that the impact of such a decision would be minimal as the Rs.2000 note accounts for only 1.6% of the overall money supply.
- Impact on digital transactions: According to the BCG report, digital transactions are expected to increase 3 times from 2023 to 2026, thereby minimising the need for higher denomination currency.
- Increase demand for high-end items: There could be an increase in the purchase of high-end consumer items like electronic gadgets, phones, and home appliances.
- Reduce fake currency notes: Since high denomination currency is easier to be targeted by counterfeiters the government can tackle this problem after the withdrawal of currency.
- Impact on the informal economy: The informal economy which largely operates on cash-based transactions is bound to be hit by the decision. Day-to-day transactions of MSMEs, the transport sector, construction, agriculture, and small traders would be negatively impacted reducing in hand cash for them and impacting their daily budget. There would be less disposable income for housewives, and old age persons as they are genuine hoarders of currency notes.
What steps can RBI take to ensure formalization of the economy post withdrawal ?
- Strict enforcement: RBI should ensure that high currency notes are not exchanged in banks which rely on physical records and not digital records particularly regional rural banks and urban cooperative banks. These banks are prone to corruption and influence of local politicians.
- Vigilance on banks: RBI must ensure that banks maintain vigilance on on amount of notes exchanged daily.
- Strict legal action: RBI should take strict legal action against bank officials who are found suspected of corruption. Random inspections and sensitising bank official on how to deal with the public during this phase is very crucial.
- Cooperation among agencies: RBI should actively cooperate with the Government of India, the Central Board of Direct Taxes, and the National Financial Reporting Authority to nab shell companies and corrupt officials.
Conclusion:
Government should ensure that adequate steps are taken to cushion the informal sector from this decision and ensure that daily workers, farmers, and MSMEs are properly compensated for any loss of income.
