Implications of government's 'slow demonetisation' of Rs 2,000 note

The quiet and gradual phasing out of the high-value notes makes one wonder why Modi government couldn't do the same with Rs 500 and Rs 1,000 notes.

 |  5-minute read |   08-05-2018
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The Rs 2,000 note, in currency since the controversial demonetisation policy unveiled by Prime Minister Narendra Modi on November 8, 2016, was like a terminally ill baby. Within a month of its birth, demands were made to kill the baby and none other than RSS ideologue S Gurumurthy had said the pink note would be phased out of the system within five years. Now, one-and-a-half years after demonetisation, this problem child has been given euthanasia treatment.

Economic affairs secretary Subhash Chandra Garg has gone on record in confirming this, saying thus: “There are about Rs 7 lakh crore of Rs 2,000 notes in circulation, which is more than adequate and so no new Rs 2,000 notes are being issued.”

Garg elaborated his statement with following observations: "Currencies in Rs 500, Rs 200 and Rs 100 denominations are comfortable mode for transactions and the printing of Rs 500 notes have been ramped-up to about Rs 3,000 crore every day to take care of extra demand," even as he asserted that the cash situation in the country was "quite comfortable" and extra demand was being fully met.


The top bureaucrat also said he had reviewed the cash situation in the country last week and 85 per cent of the automated teller machines or ATMs were functional.

This raises several questions about the Rs 2,000 note, the ATMs and the larger policy issues. Let's take up the ATMs issue first.

Declining number of ATMs

Banks are now treating ATMs as independent units and have thus become more cautious about their economic viability. According to RBI data, banks shut down 2,000 ATMs in various locations in 10 months between May 2017 and February 2018 due to the overriding concern for cost cutting. This means that two hundred ATMs were shut every month or almost seven per day. As on February 2018, the total number of onsite ATMs of banks is down to 107,630 from 110,116-odd in May 2017.

The depleting number of ATMs doesn't augur well for a government which has repeatedly claimed that cash crunch is over. It multiplies government problems after it has now formally announced stopping the production of its highest denomination currency note.

The Rs 2,000 note

It has been speculated for long that the government would demonetise the Rs 2,000 note. This speculation was at its peak on the first anniversary of demonetisation. Reasons were two-fold:

1) The highest value currency note had served its prime purpose of quickly remonetising the financial system after 86 per cent of currency was demonetised by banning Rs 500 and Rs 1, 000 notes;

2) Once this purpose was achieved, the Rs 2,000 note was more of a tool in the hands of economic offenders than a convenience for the common man who in any case finds it quite a bother to transact this high-value note.

It's known that the government has stopped printing of new Rs 2,000 notes for quite some time, probably for the past 10 or 12 months. However, there is no official news in public domain as to when exactly the government stopped printing the Rs 2,000 notes. The ATMs also have no longer been dispensing Rs 2,000 notes for many months, making it clear that the government is quietly withdrawing these notes and not putting them back into the system.

Now, let's get back to another quote from Garg: “There is enough cash which is being supplied and there is extra demand which is being fully met. I don't think there is any cash-related crisis or problem at this point in time... Rs 500 and Rs 200 and Rs 100 notes are people's medium of transaction. That's what people use, people don't find Rs 2,000 note as a very comfortable medium for making transactions. Rs 500 notes is very adequately supplied. We have ramped up production to the level that it is about Rs 2,500-Rs 3,000 crore a day. So, that is much more than any demand.”

But the question is why this over dependence on just one currency note of Rs 500 denomination. Even if one is to go by the rate given by the economic affairs secretary, the government will be able to print Rs 500 denomination notes worth Rs 10 lakh and Rs 95,000 crore or a little less than Rs 11 lakh crore. At the time of demonetisation, the total currency in circulation was to the tune of Rs 18 lakh crore. Now 18 months later, the currency requirement would be much more than that given the claims of the government itself that the economy is on a rebound.

But how it is going to be done without modernising and substantially enhancing production capacities of the existing four printing presses which print and supply bank notes (Dewas in Madhya Pradesh, Nasik in Maharashtra, Mysore in Karnataka, and Salboni in West Bengal) and four mints for minting coins (Mumbai in Maharashtra, Noida in Uttar Pradesh, Kolkata, and Hyderabad)? We haven't heard of any near term plans of the government in this regard.

Similarly, the government needs to ramp up its wide network of more than 4,000 currency chests and over 3,700 coin depots which are extended arms of the Reserve Bank Issue Departments and are responsible for meeting the currency requirements of their respective regions. One would like to know if there any plans by the government to modernise these.

The quiet and gradual phasing out of Rs 2,000 notes makes one wonder why the government couldn't do the same with regard to Rs 500 and Rs 1,000 notes which could have prevented scores of deaths and sufferings of majority of citizens.

But perhaps the Modi government had no time for a long wait to get Rs 500 and Rs 1000 notes out of the system and replacing them with new notes.

This poses a question - whether PM Modi's demonetisation move was an economic move or a political masterstroke in view of the then impending Assembly polls in Uttar Pradesh as the move took political rivals unawares and in the grip of cash crunch?

What happened in UP polls shortly thereafter is history.

Also read: Why BJP's present and former allies are wary of partnering with it


Rajeev Sharma Rajeev Sharma @kishkindha

The writer is an independent journalist and a strategic analyst.

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