Economists and columnists have been hard at work trying to find any logic to the 2000-rupee withdrawal notice from RBI, just as they tried six years ago to find any economic justification for demonetisation of the 500 and 1000-rupee notes.
The following is an effort to argue that the purpose of “demonetisation” was likely political and not economic. And hence the withdrawal of the 2000-rupee notes may also have a lurking political motive and possibly very little economic rationale.
First let us visit the economic rationale that was given for demonetisation in 2016. The prime minister announced that it was a mission to scoop out black money and end fake currency which was being used to fund terrorism. Further, some politicians privately said that they expected 3 to 5 lakh crore of notes not to be returned, since black money hoarders wont want to be caught with unaccountable income. This, in turn would reduce the RBI’s liabilities and hence increase the transfer of surplus of 3-5 lakh crore rupees to the government which could be distributed via social welfare schemes.
But in reality, within just seven weeks, over 99.9 percent of the notes returned to the RBI. Consequently no major surplus could be transferred to the government.
The argument that black money would end or even be reduced was always dodgy. The RBI board members, as revealed to an RTI applicant, clearly mentioned in the minutes to the demonetisation meeting that black money is held in India through assets like land and gold and hardly ever in cash.
Demonetisation was also supposed to bring down cash in circulation, but that metric actually shot up from 12.1 percent pre-demonetisation to 14 percent after two years. It has lately come down due to the spread of UPI. But at 12.5 percent is still above the pre-demonetisation levels.
Yet another bright argument in favour of demonetisation was that as people brought their unaccounted cash into bank deposits, they would have to follow it up with declaration of higher incomes in subsequent years and hence higher tax payments. India’s tax to GDP (Gross Domestic Product) ratio showed no increase in 2017 to 2021. There is a slight increase in 2022 which experts attribute to more formalisation of the economy due to GST and may be even Covid pandemic.
As for fake or counterfeit notes, every year the RBI releases the number of fake notes detected. It has almost always ranged between 0.0015 percent and 0.002 percent both before and after demonetisation. And, finally, as data collected by the South Asian Terror Portal shows, terror attacks in 2017 were more than in the preceding years. Data thus provides no connect between demonetisation and reducing terror financing or fake notes.
If demonetisation of 85 percent of the currency didn’t help in reducing black money or increasing taxes, it is tough to expect withdrawal of 10 percent of the currency to achieve that. There are some brave supporters who hope that those storing unaccounted cash in 2000-rupee notes may be hurt, but so far no one in RBI or government is saying so.
The RBI's rationale of "clean note policy" is a tad tough to swallow when we still have notes signed by governors Jalan to Patel circulating. Some columnists are worrying or wondering as to what happens to the legal tender status of the 2000-rupee notes, after the September 30 deadline for returning them. That may be an academic, even pointless question. Who, in their right senses, will hold 2000-rupee notes willingly after September 30?
Already no shopkeeper or vendor accepts them. Even the not-so-savvy will know there is absolutely no chance of doing any transaction in 2000-rupee notes beyond September 30. So, in all probability, all of it will be returned. Especially by those who hold unaccounted money. They have perfected the art of finding mules in 2016 when they had to exchange 15.4 lakh crore rupees; 3.6 lakh crores is child’s play, especially after the rehearsal in 2016 went so well.
So, now that all economic and financial arguments in favour of these steps have been laid to rest, perhaps the reasons lie elsewhere. Let us recall that in the immediate aftermath of demonetisation (in Dec 2016), the BJP won a resounding victory in the UP assembly elections in February 2017. That election was fought by the party, partly as a crusade against suit-boot-ki-sarkar.
Now, the 2000-rupee withdrawal was announced in the same week that the BJP lost in the Karnataka elections. The September 30 deadline is a month ahead of the polls in MP and Chhattisgarh and seven months ahead of the national elections. If perchance the administration is able to catch a couple of crooks laundering their unaccounted money, the image of the party as a crusader against the filthy-rich can come in handy. No harm in trying the old medicine, just in case it works. Every bit counts, when the stakes are high.
(Edited by : C H Unnikrishnan)
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