-Panagariya noted that Rs 2,000 currency notes represent only 10.8% of the cash currently in the hands of the public and probably most of it is being used for illicit transactions
“Neither will it affect the operation of India’s economic and financial system. There is going to be zero impact on GDP growth or public welfare,” former finance secretary said
New Delhi, NFAPost: The RBI’s decision to withdraw Rs 2,000 currency notes from circulation will not have any ‘perceptible effect’ on the economy as any such notes returned will be replaced by either equivalent cash in lower denomination notes or a deposit, former NITI Aayog Vice Chairman Arvind Panagariya has said.
Panagariya further said the likely motive behind this move is to make the movement of illicit money more difficult.
“We will not see any perceptible effect on the economy. Any currency in Rs 2,000 notes returned will be replaced by either equivalent cash in lower denomination notes or a deposit. So money supply will not be impacted,” he told PTI.
Panagariya noted that Rs 2,000 currency notes represent only 10.8 per cent of the cash currently in the hands of the public and probably most of it is being used for illicit transactions.
The Reserve Bank of India had announced withdrawal of Rs 2,000 currency notes from circulation, and existing notes in circulation can either be deposited in bank accounts or exchanged by September 30. The bank notes in Rs 2,000 denomination will continue to be a legal tender, the RBI had said in a statement.
Asked whether the public will face inconvenience due to this move, the eminent economist said many citizens probably have no Rs 2,000 notes since few transactions take place in those notes.
“For those who do, inconvenience will not be beyond an extra trip to the bank. Even that can be avoided by exchanging Rs 2,000 notes when visiting the bank for some other transaction,” he said.
Asked is there is a need for Rs 1,000 currency notes, Panagariya said,”As of now, I do not see a need to issue Rs 1,000 notes as citizens have become used to transact in notes of Rs 500 or lower denomination.”
Explaining further, he pointed out that per capita income in the US in 2021 was $70,000 and its highest denomination note is $100. This gives ratio of per capita income to the highest denomination note at 700.
In India, per capita income in 2021 was approximately Rs. 1,70,000.
“For the same ratio of per capita income to the highest denomination note as in the US, our highest denomination note would have to be Rs 243. So, Rs 500 note as the highest denomination note would seem to be about right for us, given that we are still more of a cash economy than the US,” he said.
The RBI started printing Rs 2,000 notes in November 2016 after Prime Minister Narendra Modi scrapped high-value Rs 1,000 and Rs 500 notes overnight.
He opined that one lesson of November 2016 demonetization was that tracing black money is incredibly difficult. “The most you can do is to make future illicit transactions more difficult by eliminating high denomination notes,” he said.
Rs 2,000 note withdrawal non-event, won’t impact economy: Ex-finance secy. Withdrawal of Rs 2,000 currency notes is a ‘non-event’ and will have zero impact on the economy and monetary policy, former finance secretary Subhash Chandra Garg said.
The higher denomination currency note of Rs 2,000, he said, was pressed into service at the time of demonetisation in 2016 for ‘accidental reasons’ to meet the temporary currency shortage.
With rapid growth of digital payments over the last five-six years, Garg said withdrawal of Rs 2,000 currency notes, which is actually a replacement by other denominations, will not affect total currency in circulation and therefore will have no monetary policy effect.
“Neither will it affect the operation of India’s economic and financial system. There is going to be zero impact on GDP growth or public welfare,” he told PTI.
In a surprise move, the Reserve Bank on Friday announced withdrawal of Rs 2,000 currency notes from circulation but gave public time till September 30 to either deposit such notes in accounts or exchange them at banks.
It is quite easy to expect almost all the Rs 2,000 currency notes in circulation to come back to RBI and there is unlikely to be any inconvenience or loss to anyone because these notes form a small part of the currency in circulation and not widely used for day-to-day transactions, he said.
Clarifying that the withdrawal of currency notes by RBI is not demonetisation, he said, it is the government which has the authority to withdraw the legal tender status of currency notes, not RBI.
Rs 2,000 currency notes will continue to remain perfect legal tender therefore, he said, adding, RBI’s measures are largely an attempt to nudge people holding these notes to get the same exchanged for other currency notes in circulation.
Garg, who was Economic Affairs Secretary and in-charge of coin and currency division during remonetisation days, said Rs 2,000 notes were introduced not as a well thought out measure but something which was only available readily to latch on.
The government had perhaps approved printing of Rs 2,000 currency notes a few months before demonetisation to introduce a higher denomination note, he said.
The fate of Rs 2,000 currency note was sealed even before it was introduced and it had to make its way out as soon as possible, he added.
Garg said the process of reducing the circulation of Rs 2,000 notes for its eventual phase-out started soon after demonetisation.
The total value of Rs 2,000 currency notes was about Rs 7 lakh crore when an in-principle decision was taken in July-August 2017 to not print any more Rs 2,000 notes, he said, adding, a small quantity of such notes were printed in March-April 2018 to tide over the mini currency notes shortage at that time.
As per an RBI press release, the printing of Rs 2,000 notes was completely stopped in 2018-19.
With the stoppage of printing of such notes, the path of elimination of these notes was firmly secured and the government printed much larger than normally required Rs 500 currency notes in 2018-19 to facilitate withdrawal of Rs 2,000 notes, he said.
Steps to phase out Rs 2,000 notes have brought down the percentage of these notes in circulation to 10.8 per cent in March 2023 from a high nearly 75% in March 2017.
According to ICRA, the deposit accretion of banks could improve marginally in near term due to RBI’s move to withdraw Rs 2,000 notes. This will ease the pressure on deposit rate hikes and could also result in moderation in short-term interest rates, said ICRA senior vice president Karthik Srinivasan.
Such measures further reduce/eliminate the probable cash component in high-value real estate transactions, said Vimal Nadar, head of research at Colliers India.
In the last few years, RERA and demonetisation have brought in significant levels of transparency in real estate, mainly contributing to fair market price determination, Nadar said.
Agencies
