In defence of Rs 2,000: Slowdown in printing illogical, consumer-unfriendly

The accelerated withdrawal of the Rs 2,000 note over the second half of 2017 and first quarter of 2018 has been widely cited as the key reason for the cash crunch in select states. The Reserve Bank of India (RBI) has mostly faced criticism for being unable to manage the compensatory supply of a larger number of notes of a smaller denomination to make good the slowdown in printing this higher value note. But the central bank and the government may want to consider whether the drastic reduction in the printing of the Rs 2,000 note is a wise decision in wider consumer interest as well. The government has been frustratingly tight-lipped about the printing and supply of these large denomination notes — bar one bland statement from the Economic Affairs Secretary on April 17 stating that printing of Rs 2,000 notes had been “halted since a few days” because there were “sufficient” notes in the system. It has been deduced from this observation that supplies may have been halted because in terms of value, the Rs 2,000 notes in circulation had touched 98 per cent of the value of the old Rs 1,000 notes (now defunct) that were in circulation when demonetisation was announced on November 8, 2016. 

If this is the ostensible reason for halting the supply of Rs 2,000 notes, it betrays a limited and static view of economic activity in India. Although RBI statistics show that currency in circulation has surpassed pre-demonetisation levels, it has been lower as a percentage of GDP — with March 2018 marking a low point. This fact alone would indicate the need for printing more notes, even as falling income velocity indicates that cash is being hoarded in larger quantities. Indeed, evidence is mounting that the stated objectives for demonetisation — unearthing black money, boosting online transactions — have failed and cash transactions are back in business, so to speak. This is borne out by data that shows that regions that have reported a cash crunch are those that were supplied the most cash since November 2016. Against this backdrop, the slowdown in printing the Rs 2,000 note appears illogical and consumer unfriendly. As a store of higher value, it offers a convenient medium for legal cash transactions, especially for small and medium businesses. 

So far, two popular arguments have militated against the note. First, that a transaction involving the Rs 2,000 note often requires recipients to keep a larger number of smaller-value notes to provide change. This can be addressed if the central bank prints sufficient numbers of smaller-denomination currency as well. Second, a higher value note improves the logistics for hoarders. Again, the solution to this problem does not lie in the denomination of currency but in strengthening the institutional mechanisms that discourage black money generation. Similar arguments were made when the Rs 500 note was introduced in 1987 to contain the increasing number of banknotes in circulation. A few years later, the inherent convenience of a larger denomination note made all those arguments moot. The short point is that the economy not only needs more notes, but an expanding economy with a reasonable degree of inflation needs more notes of larger denomination, too, and it is for the central bank to balance these requirements. The Rs 2,000 note admirably serves this purpose.