A late evening announcement by the Reserve Bank of India (RBI) on May 19 of its decision to withdraw Rs.2000 denomination currency notes from the circulation was shocking for one and all.
The central bank gave the time till September 30 to exchange or deposit the high-denomination note. Even as the recall of Rs.2000 banknote is not demonetization, though some called the move as ‘soft demonetization’, it took no time for the general public to revisit the memories when none other than the Prime Minister Narendra Modi in an unscheduled speech on primetime TV on November 8, 2016 declared that all 500 and 1,000 rupee notes invalid.
The demonetization drive in November 2016 had shaken the financial system and people had nearly lost confidence in the Indian Rupee (INR). It took years for the central government to rebuild the trust and make the public believe that all is well with the Indian Rupee.
Let me share my own nervous moments with INR after a few months of demonetization. I was loudly told that “we don’t exchange Indian currency”. Actually, during my visit to the United Arab Emirates (UAE) in March 2017, I presented myself before a ‘Teller’ at a United Arab Emirates (UAE) Bank branch after waiting in a queue for about half an hour to seek exchange of my currency (INR).
Even as I tried to convince the bank official that the banknotes presented for exchange were not the demonetized one, he quoted the instructions of his top management not to accept any denomination of the INR. The blunt refusal of the ‘Teller’ at the bank branch in the presence of a good number of customers was embarrassing even though my currency in INR was genuine and valid. Precisely, my currency shamed me that day for none of my fault.
However, the story didn’t end here. There were private currency exchange houses (other than banks) in UAE who were exchanging INR without any questioning. But they would offer the exchange facility at a lower rate than the market rate.
The denial of exchange facility of the Indian currency at the banks in UAE, which one of my acquaintances working there in one of the leading banks revealed, forced customers to be at the mercy of these private currency exchangers and were compelled to purchase one Dirham at higher rates.
This personal experience of currency exchange is of course brief, but it directly leads to the untold story of the currency crisis in which INR was gripped in the post demonetization scenario.
Now coming back to the withdrawal of Rs.2000 currency note, let’s understand that it’s not an act of demonetization which we faced in November 2016. Basically, the Rs 2,000 note was introduced in November 2016 to meet the currency requirement soon after Rs 500 and Rs 1,000 notes were demonetized.
Over a period of time, the printing of the Rs 2,000 note became subject of discussion as most of the experts were vomiting their concern over the ‘possible misuse of this high denomination note’. The printing of this note was finally stopped in 2018-19 as low denomination notes were adequately made available in the system.
Notably, there is a visible difference between the demonetized currency notes and the notes that are withdrawn from circulation. In demonetization a currency note becomes invalid from the day the decision comes into force. In case of ‘withdrawal’ of a currency note, the market would not get a new supply of the said currency note and the existing notes will remain legal tender but exhausted gradually.
Pertinently, some years back, the Reserve Bank of India (RBI) had launched the drive to withdraw all banknotes printed before 2005 at the end of March 31, 2014. However, it was clarified that the notes issued before 2005 would continue to be legal tender. This meant that banks were required to exchange the notes for their customers as well as for non-customers.
Notably, demonetization has its own history in India. Let me borrow some facts from the RBI documents reproduced by some experts in their opinion pieces.
For instance, in the backdrop of World War II and rising black market operations, the government of India demonetized Rs 500, Rs 1000, and Rs 10,000 notes in January 1946. However, all the three notes were reintroduced in 1954.
On January 16, 1978, the Janata Party government, led by Prime Minister Morarji Desai, demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes under the High Denomination Bank Notes (Demonetization) Ordinance, 1978. Notably, the Wanchoo Committee, a direct tax inquiry panel set up by the government and led by former Chief Justice of India Kailash Wanchoo, had suggested demonetisation of some notes as a measure to unearth and counter the spread of black money.
In 2014, the RBI announced withdrawal of notes issued before 2005 from circulation. From April 1, 2014, the public was required to approach banks for exchanging these notes. Banks provided an exchange facility for these notes. As per the RBI statement, these notes were withdrawn because the currency printed before 2005 had fewer security features when compared with the banknotes printed after 2005.
If we look at the demonetization or withdrawal of currency notes in the country, the main purpose has been to curb black money and put an end to the parallel economy. This time, loud statements were emerging across various segments of the society that Rs.2000 notes are being hoarded by unscrupulous elements for money laundering and to evade taxes. In other words, this highest denomination note earned a tag of ‘dirt money’ for extending convenience of misuse.
All of us know that the dirty money is a reality. The primary function of money is to serve as a medium of exchange. As such it is accepted in the form of currency and coins in final discharge of debts or payment of goods or services. Even as the money in itself is not an evil, it’s the wrong use which has made the money dirty.
Money is considered as the root of all problems. It’s the money which is responsible for many mischief and evils. Corruption, black marketing, smuggling, drug trafficking, tax evasion or any form of evil existing in our society, the root cause is the misuse of money. The money-crazy people want more money to cater to their needs and during the course they don’t hesitate to have money from any source and it’s here the money laundering is prosperously triggered.
The impact of this dirty money has a direct bearing on our economy in several ways. In the first instance it leads to the misdirection of our precious resources.
The income distribution gets worsened. It is interesting to note that there are income tax advisers, chartered accountants and other financial advisers who are part of the establishment of dirty money operators.
One of the big disadvantages is that the dirty money has viciously corrupted every system. Succinctly, the politics of dirty money has decomposed our moral fibre.
The existence of this huge hidden segment of the economy has handicapped our planners in making a correct analysis and formulation of right developmental policies for various sectors of the economy. So, if the dirty picture of the money is not cleaned, it’s sure to lead us to ruin.
To conclude, the war on black money through the withdrawal of Rs.2000 banknotes is all in the interest of the general public as it would make the economic cycle free of dirty money. Of course, it will have its own disadvantages, but such disadvantages are momentary.
(The views are of the author & not the institution he works for)
DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.