IN THE PINK? Two economists debate the decision withdrawing ₹2,000 notes

Source: The post is based on the article “IN THE PINK? Two economists debate the decision withdrawing ₹2,000 notes” published in The Times of India on 24th May 2023.

Syllabus: GS – 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About RBI’s decision to withdraw Rs 2,000 notes.

News: The Reserve Bank of India (RBI) has decided to withdraw the Rs 2000 denomination banknotes from circulation.

Why has the RBI withdrawn Rs 2,000 notes?

Less frequency of Rs, 2000 notes: Higher denomination note like Rs 2000 will change hands much less than lower denomination notes. Given the value of India’s digital transactions, the usage of Rs. 2000 is further low. According to a BCG report, digital transactions are expected to multiply three times from now to 2026, thereby minimising the future need for the ₹2,000 note.

What are the advantages of the withdrawal of Rs 2,000 notes?

What are the concerns highlighted by experts on RBI’s decision?

Against internationalisation of the Rupee: Along with a 20% tax on international credit and debit card transactions, frequent withdrawal of currency notes without prior warning will diminish India’s efforts to internationalise its currency.

Other cheaper alternatives instead of withdrawing: a) If these notes have served their purpose, then instead of withdrawing the RBI could have simply instructed banks to stop dispensing these notes, b) Since the notes are not being demonetised, RBI could have also allowed users to exchange or deposit them over an unlimited period of time, instead of imposing a deadline of September 30, 2023.

Timing of the announcement: Indian economy is struggling at present. Forecasts by major organisations show the economy is going to slow down in 2023-24. To revive rapid economic growth, it is essential to ensure policy stability and predictability. But the withdrawal of currency is against this.

What should be done?

1) RBI must mandate banks that rely on physical records (urban cooperative banks and/or regional rural banks) cannot exchange the ₹2,000 note. As physical records cannot be tracked easily, they provide significant avenues for corruption.

2) RBI must create a crack analytics team to monitor the amount of ₹2,000 notes exchanged in every branch daily. If the branches cross the previous thresholds, then the taxpayers in that particular branch need to be scrutinised.

3) RBI must also create a crack team of incorruptible officials who can make random visits to bank branches to a) understand new methods corrupt bank officials use to convert hoarders’ cash and b) catch corrupt bank officials red-handed.

4) Central Board of Direct Taxes must work closely with RBI to get branch-level data on cash deposited by the branch.

5) Ministry of Corporate Affairs and the National Financial Reporting Authority need to ensure that shell entities are not created to channel hoarded cash.