Impact on Economy by scrapping 2000 notes

The Indian economy will withdraw its highest denomination currency note from circulation, the central bank said on May 19. The 2000-rupee note will remain legal tender, but citizens have been asked to deposit or exchange these notes by September 30, 2024.

India will withdraw its highest denomination currency note from circulation, the central bank said on 19th May. The 2000-rupee note, introduced into circulation in 2016, will remain legal tender but citizens have been asked to deposit or exchange these notes in the next four months, that is September 30, 2024. The decision for many is reminiscent of a shock move in 2016 when the Narendra Modi-led government had withdrawn 86% of the economy’s currency in circulation overnight. The impact of that decision is faced even today and had been a cause of inconvenience for the public. Post this announcement, social media is abuzz with speculations about the nature of this move with many comparing it with the 2016 mega demonetization drive however this move in reality isn’t similar to the demonetization drive.

The main issue we address here are the why and the aftermath of this bold move and whether it is truly beneficial for the economy or just a strategic move before the 2024 general elections?

The reason behind the government scrapping 2000 rupee notes

While the notes will remain legal tender, Indian citizens have been advised to deposit or exchange them by 30 September 2024. The move is expected to boost dwindling deposit rates and aid the banking system’s liquidity. Economists also suggest the move could benefit India’s bond markets in the short term, but could initially pose problems for cash-dependent sectors such as agriculture and construction.

When 2000-rupee notes were introduced in 2016 they were intended to replenish the Indian economy’s currency in circulation quickly after demonetization. However, in the current scenario, 2000 rupee notes were in surplus in the market and its printing was stopped over the past four years for the benefit of the economy. This trend is an indicator that the government and RBI had always planned to scrap the 2000 rupee notes however the main question we address is why now? And will this be beneficial for the economy or not?

Impact on the Indian economy

The value of 2000- rupee notes in rotation in the Indian economy is Rupees 3.62 lakh crore ($44.27 billion). This is about 10.8 of the currency in rotation which ranks to a huge proportion because of which the functioning may face many turbulences still in a statement Nitsure said, “This pullout won’t produce any big dislocation, as the notes of lower amounts are available in sufficient amounts”. Still, the main nuisances will be faced by small businesses and cash-acquainted sectors similar to husbandry and construction, said Yuvika Singhal, an economist at QuantEco Research. Fresh measures must be taken by the government to help them adapt with minimal vexation.

As the government has asked people to deposit or change the notes for lower appellations by September 30, bank deposits will rise. This comes at a time when deposit growth is lagging behind bank credit growth and this will lead to a positive comeback for the banking sector. Also, this will ease the pressure on deposit rate hikes, said Karthik Srinivasan, group head of fiscal sector conditions at standing agency

Reflecting upon the timing

While the government and the central bank didn’t specify the reason for the timing of the move, judges point out that it comes ahead of state and general choices in the country when cash operation generally harpoons. The trends do indicate that while the government always had this in mind, the time frame named is questionable. Was this just a decision or a strategic movie taken before the 2024 general choices is the question. Looking at both the cons and negatives it can be inferred that overall this move has a lot of plus points and some fresh measures need to be introduced by the government to make the transition easier. And whether this move was strategically taken considering the general choices in mind will be seen in the forthcoming future.