The mystery behind the lack of ₹2,000 notes!

Oh ₹2,000, where art thou?

With India moving towards UPI and wallet based transactions, cash still remains king! But what happened to the magenta colored ₹2,000?

the Back in Bangalore, most of my expenses were either via cards, UPI, or digital wallets. I never really withdrew a significant amount of cash for my transactions, nor did I worry about keeping a lot of cash at home!

About 45 days ago, I came to Kolkata to spend time with my family. Most transactions in the city are cash-based, rather than card or wallet, meaning a lot more ATM visits!

While withdrawing cash from ATMs or seeing my parents transact in cash with vendors, one thing struck me, where is the Magenta shade ₹2,000 note? It’s been ages since I saw one!

On 8 November 2016, PM Modi announced the demonisation of all ₹500 and ₹1,000 banknotes and issuance of new ₹500 and ₹2,000, in place of the old ones!

The prime reason was to reduce black money and stop the use of counterfeit notes.

Needless to say, the move failed to achieve its objectives. (Notes in Appendix)

The ₹2,000 note may be being withdrawn from circulation!

But what did happen to the ₹2,000 note?

In early 2019, the government indicated the printing of the note had stopped due ‘enough being available in the market.’

Around the same time, in a tweet, Subhash Chandra Gard, the economic affairs secretary mentioned that the plan to print more notes was as per the projected requirement, indicating that over 35% of notes by value in circulation were ₹2,000 notes!

In a separate reply to an RTI a year ago, the RBI replied that in FY17, 3,542.991 million notes were printed. In FY18, it came down to 111.507 million notes, further reducing to 46.69 million in FY19. That too till 18 May. Since June, not a single ₹2,000 note has been printed.

That’s a 96% drop from FY17 to FY18, and another 58% from FY18 to FY19.

The reason that the government and the RBI introduced the ₹2,000 note in the first place was, I think, due to a cost and ATM load factor!

According to India Today, to push ₹10,000 to the economy, the RBI would have to print ten ₹1,000 notes into the economy, means spending ₹35.4 to print them (the cost to print per ₹1,000 note was ₹3.54).

With ₹2,000 notes, they would’ve spent ₹20.9 (the cost to print per ₹2,000 note was ₹4.18). It meant a saving of ~41%. Printing money to replace old ₹1,000 notes with new ₹2,000, that runs into trillions of rupees would mean a lot more cost-savings.

Also, it meant ATMs could load and dispense a lot more money!

While the introduction may sound like optimistic, in reality, the story was different!

Reports circulated that people were unable to dispose of the ₹2,000 notes at retail chains or petrol pumps, resulting in a lot of difficulties for them to offload the note!

Over time, even banks stopped actively pushing it. In fact, the state-owned Indian Bank, on 17 February 2020 through an internal circular, notified its lenders to stop loading the currency denomination to its ATMs. From 1 March, all Indian Bank ATMs were disabled to dispense ₹2,000 notes!

Late last year, there were fears that the government banned the note, but Minister of State for Finance Anurag Thakur dispensed all rumours!

The government reconfirmed that they had not discontinued the notes two weeks ago as well. They did acknowledge they lowered the printing of the note!

Latest data from RBI show that the demand for ₹2,000 rupee may have surged amidst people holding onto cash during COVID for a sense of security, due to the uncertainty!

The growth of currency in circulation, money issues less money removed from the system, has risen to 9.5% in fiscal 2020–21, compared to 2.6% a year ago!

Even the Y-o-Y growth as of 4 September 2020 was 22.6%, compared to 13% last year! It is also evident when the growth is compared to the end of March 2020 figures, where Y-o-Y growth was 14%.

A report from Zeebiz, two weeks ago, mentions that 273.98 crore notes of the denomination of ₹2,000 were in circulation as of 31 March 2020, compared to 329.10 crore notes as of 31 March 2019.

This proves that while demand for the ₹2,000 note may have risen, people are storing ₹500 and ₹200 notes a lot more!

It raises a question, is the withdrawal of ₹2,000 good?

From a consumer perspective: Yes, because to offload ₹2,000 for change at stores was an ordeal! With an increase in circulation of ₹500 and ₹200 notes, it becomes easier to offload them!

From a government perspective: Yes and No

No, because the charges of printing increase significantly. Like mentioned earlier, to distribute ₹10,000, it would cost ₹20.9 to print ₹2,000 notes. With the cost of printing ₹500 notes at ₹2.57 per note, it would cost the government ₹51.4, 1.45x more than the former!

Yes, because according to Finshots, they cite a report that states high denomination notes are the preferred instruments of choice for those evading taxes, committing crimes, etc. Cash transactions, since they leave no record, offer anonymity and can be stored with low detection risks.

While it MAY allow the government to curb storing of liquid cash and cut off funding tracks for terrorists, it would ensure they do not lose out on revenue, since the government cannot tax cash transactions that go undetected!

The former has already failed once! One of the other reasons for denomination was to stop the financing of terror activities with Indian money, but alas, the government could not stop that. A terrorist killed in Bandipora on 22 November 2016, 2 weeks after the demonisation announcement had new ₹2,000 notes on him!

It’s still unclear if the RBI and the government are secretly withdrawing the ₹2,000 notes! Time will tell.

With a rise in UPI transactions amidst the virus concerns and ₹200 and ₹500 notes easily available, consumers are not really complaining!

Do you see a lot of ₹2,000 notes in circulation? Or do you think the government is secretly withdrawing it?

Will withdrawing the ₹2,000 note help the government, consumers, or the economy?

What do you think?

Appendix

Why Demonisation was a failure? Data points captured from BBC:

- ₹15.28tn of the total ₹15.44tn (total amount of money in circulation when demonisation was announced) was recovered, means 99% of the notes were in banks. The hope, I believe, was that black money would not make its way into banks because individuals wouldn’t want to be associated with the tag, thus destroying the money.

- The number of fake notes (old ₹500 and ₹1,000) detected by RBI, between April 2016 and March 2017, was 573,891. Total notes withdrawn from circulation was 24.02 bn. That’s 0%. Without demonisation, the number of fake notes detected the previous year was 404,794. While people may argue that’s 42% more banknotes, compared to the total number of notes that should have ideally been detected due to demonisation, it’s as good as 0%

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