ABSTRACT
The 2016 demonetization left the country in a panic and chaos. A similar step was taken recently by The Reserve Bank of India where they withdrew from circulation all the 2000 currency bank notes. But the legal tender of these notes remained unchanged even after the deadline. People had a Deja-vu with the 2016 demonetization and feared something of the similar kind. While the government reassured the public that this withdrawal is quite distinct from the demonetization process that took place in the past. It also advised people not to create chaos and rush to the banks keeping in mind various factors attached with this withdrawal. But how is this withdrawal any different from the past? This research paper attempts to have a deeper analysis of every aspect of the recent withdrawal, the reasons stated by the apex bank for the withdrawal, understating the law behind this move, a comparison that how this withdrawal is different from the past demonetization and ultimately how this withdrawal will in turn impact the overall economy of the nation.
KEYWORDS
Reserve Bank of India, Demonetization, Withdrawal, Clean Note Policy, RBI Act
INTRODUCTION
19th May 2023, The Indian government in a surprising move, withdrew the 2000 currency notes from circulation. Introduced in November 2016, under Section 24(1) of Reserve Bank of India Act, 1934 (RBI Act)[1] was a significant part of the government’s 2016 demonetization process. This withdrawal led to transitional disruptions in the economy and chaos among the people. Just like 2016, people rushed to banks to get their notes exchanged before the deadline. But, this time the 2000 currency notes would continue to exist in legal tender as stated by the RBI. While the public is encouraged to still get it exchanged in pursuance of the policy change. Additionally, banks are instructed to stop issuing this money and to store it in reserve. While some of the grounds given by the bank regarding this withdrawal connect with those given during the 2016 demonetization, some do not. Public debates have been significantly sparked by this government’s action, especially among lawmakers and financial professionals. The departure signifies a profound change in strategy and has another great economic consequence.
The research paper aims to mainly find out whether this withdrawal of 2000 currency notes from the market would have a positive or a detrimental impact on the economy? And for that we would first understand the statement published by RBI regarding the withdrawal, along with an analysis of the policy stated within that statement. As we go along we will look into the history of these notes being introduced in the market by the 2016 demonetization and how the demonetization is different from this withdrawal. Also understanding the judicial view of the same and what are the supreme court’s views and opinions on the government’s decision.
RESEARCH METHODOLOGY
The project was prepared using the doctrinal approach to research. Many primary and secondary sources, including government documents, books, journals, and online resources, have been mentioned. There was no fieldwork-based empirical data used in this investigation.
REVIEW OF LITERATURE
The notification issued by RBI on 19th May 2023 left the nation in a surprising state. After facing demonetization once in 2016, everyone feared of a resembling situation in the future. A similar but rather different notification depicted that, RBI withdrew the 2000 currency notes from circulation in the market. These notes would still remain as legal tender but the banks are advised to cease the printing of such currency notes and people are advised to return such notes to the banks or get them exchanged. The 2016 incident was still in our memories, due to which some amount of panic among the people returned and people again rushed to banks. In 2016, Following the passage of the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016, the RBI’s obligation with regard to the prior 500 and 1000 note series was terminated. This decision taken by the government was also challenged in the court in Vivek Narayan Sharma vs Union of India, which claimed that there had been no violation of the RBI Act in demonetizing such currency notes.
THE WHOLE CONCEPT OF WITHDRAWAL OF 2000 NOTES
The RBI claimed in a statement that the introduction of the 2000 currency notes pursuant to Section 24(1) of the RBI Act, 1934 was largely done to fulfill the urgent cash needs of the country’s economy. This action was performed after the 500 and 1000 banknotes were demonetized and were no longer accepted as legal money in the economy. RBI is now withdrawaing these notes, claiming that their printing has already halted in 2018–2019. Since the majority of 2000 currency notes were printed and brought out in the market prior to March 2017, they are towards the termination of their expected useful lifespan.
According to the announcement, these notes will be withdrawn in conformance with RBI’s ‘Clean Note Policy’. However, the 2000 banknotes will continue to be accepted as legal tender in the economy, unlike the demonetization of 2016. People are advised to deposit their 2000 currency notes into their bank accounts or to get them exchanged. People can get up to 10 notes of 2000 rupees making 20,000 rupees at once exchanged from a bank. This upper limit of 20,000 is to safeguard the interests of everyone, and ensure that an operational and trouble free exchange process can take place at the banks. The State Bank of India also informed that there would be no requirement of any form to be filled before getting these notes exchanged or depositing them. Also, a person does not have to be an account holder at the bank to get their notes exchanged.
- THE ‘CLEAN NOTE POLICY’
The ‘Clean Note Policy’ was put out by RBI in 1999, with the objective to provide only high quality and clean bank notes in circulation including coins while the notes which are worn out, or soiled must be drawn out from circulation from the system. So, all the banks were instructed by the Reserve bank to issue only clean and good quality notes out there to the public and hold back all the worn-out currency notes and not to pass on those notes to their counters. A similar incident was seen in 2014 when RBI implemented the same policy.[2]
In 2014, RBI decided to withdraw all those currency notes which were issued preceding the year 2005. The grounds for withdrawing the same were that these notes have minimal security attributes as compared to the ones which were issued after 2005. Therefore, in order to prevent fake counterfeit currency to be circulated in the market, and for improving the surveillance of these notes efforts were made by RBI. Various steps were also taken along with this to assist the policy such as instructing banks to avoid practices like stapling of bundles of notes, and instead introduce alternatives like plastic bands for the same purpose. While at the same time, people were advised to refrain from writing on the notes and the public were given full liberty to get their soiled and worn-out notes exchanged from the banks.
This same policy is being applied by the RBI while withdrawing 2000 currency notes from the market in order to prevent counterfeit currency from being floated in the economy. As any currency of high denomination is anticipated to be targeted by counterfeiters due to their value. Efforts were even made by the RBI to ensure advanced security systems being incorporated in this currency, but even then there exists a risk of counterfeit currency being circulated.
- REASONS FOR WITHDRAWING THE CURRENCY
The 2000 currency notes issued in 2016 were released with the primary objective of meeting the requirements of the economy after demonetizing 500 and 1000 notes. Once the 2000 currency notes were available in adequate quantities, their printing was stopped in 2018-2019. Statistics reveal that a majority of around 90 percent of the currency notes were published and circulated in the market ahead of March 2017 itself, with the expected standing in the economy being four to five years. Thus, fulfilling the basic objective for issuing them and achieving their estimated life span, these notes were withdrawn from circulation. This decision is also aimed to tackle issues existing in the economy such as that of counterfeit currency. The increased use of fake currency in circulation has led to RBI making stringent rules against anyone depositing fake currency in the banks [3].
While this withdrawal does not end the legal position of the notes, these currency notes would still continue to exist as a legal tender in the economy. RBI thus advised the banks to cease the issuance of these notes with an instant effect and encouraged the general public to get these notes exchanged by the banks. A time period of 4 months i.e., till 30th September is given to public to get their notes exchanged with the bank. With this, most of the notes in circulation would return back to the banks also aiding RBI in achieving the Clean Note Policy.
RBI Governor Shaktikanta Das stated that this withdrawal activity is a part of the ‘currency management system’ of the RBI in which the central bank determines how many banknotes of each denomination are expected to be required in a year and sets orders with the different printing plants for their supply. Presently, 2000 currency notes would continue to remain in legal tender and it was stated that the apex bank would decide their status after 30th September. Therefore, the ambiguity in the statements and the future of the currency notes is still in question.
BACKGROUND
On the usual day of 8th November 2016, at 8PM, the Prime Minister left the whole nation stunned by the announcement that within the next four hours the legal tender of 500 and 1000 rupee currency notes would come to an end. People were left with no choice but to rush to the banks and get their notes exchanged. But this announcement came with the introduction of a new currency of 2000 notes.
Not much longer did they exist in the economy, on 19th May by a notification issued by RBI, these 2000 notes were also withdrawn from the market. Here, we would have an analysis of the background of those demonetized notes in 2016, the legal provisions accompanying the demonetization including a case challenging such demonetization by the government, judiciary’s view on the same and how that demonetization process is different from the present withdrawal of the 2000 currency.
- HISTORY OF THE INTRODUCTION OF 2000 CURRENCY NOTES
The RBI Act of 1934’s Section 24(1) grants the central bank the authority to create currency notes for particular denominations up to 10,000 rupees, primarily to satisfy the country’s need for cash. The 500 and 1000 rupee notes that were once legal tender in the nation will no longer be so, according to Prime Minister Narendra Modi’s announcement on November 8th, 2016. By delivering a four-hour notification, the prime minister banned these notes from continuing to exist even though they represented about 86 percent of the nation’s currency. Consequently, Section 24(1) of the RBI Act was used to introduce the 2,000-rupee notes. A deadline of 30th December 2016 was given to the public to get their notes deposited in the banks which was only a period of over 50 days from the announcement [4].
This step of demonetization was taken in order to enlarge the cashless transactions in the economy and to bring down counterfeit cash flowing in the market as black money which is used to fund illegitimate activities like terrorism etc. Also taking out money from people which remained untaxed and money acquired illicitly through corruption. This announcement had an unfavorable response from the public. Long queues were spotted outside branches of banks as the public rushed to get their 500 and 1000 notes exchanged before the short deadline given to them. Reports stated that people waited tirelessly outside banks.
- LEGAL PROVISIONS REGARDING THE DEMONETIZATION
The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 [5] was propagated on 30th December 2016. This ordinance brings an end to the liability of the RBI and the government for these 500 and 1000 bank notes. These notes would no longer be guaranteed by these entities from 31st December 2016 onwards. It provides for punishment for those carrying transactions in these demonetized notes between 9th November 2016 till 30th December 2016, and any person carrying more than 10 notes after the said date would be punishable under this ordinance.
In the case of Vivek Narayan Sharma vs Union of India [6], the issue that whether RBI under Section 26(2) of the RBI Act [7] had the adequate authorization to demonetize such notes. The dispute was regarding the word “recommendation” in the section and whether the consultative process between the Central Board of RBI and the central government was taken into account before such a decision. The Supreme Court (4:1) asserted that the procedure in Section 26 of the RBI act was not violated as the Central Board’s proposal and the Government’s decision are the two conditions in sub-section (2) of Section 26 of the said act, which had been fulfilled. The word “recommendation” depicts the consultative process between the two in the very context it was used. In the dissenting opinion, Justice BV Nagarathna stated that the court has not acknowledged the cruciality of the situation and the hardships that the general public went through.
- HOW IS THE 2023 WITHDRAWAL DIFFERENT FROM THE 2016 DEMONETIZATION?
The RBI’s statement of withdrawal of 2000 currency notes left people in a surprise and the public started remembering the hardships faced by them in 2016. Because of this, people started rushing to banks to get their notes exchanged. But this time, it was very unlikely that the bank branches would have such long queues as experienced before because of a number of reasons. While RBI officials had also guaranteed that this withdrawal of the 2000 currency notes is nothing like the 2016 demonetization of 500 and 1000 ones.
In 2016, Prime Minister Narendra Modi at 8PM announced the surprise move taken with 500 and 1000 currency notes, giving the public only four hours’ notice that these notes would no longer be valid. While it was announced that these notes would cease to exist as a legal tender and would be of no value after the deadline of 30th December. Whereas, in the present situation, the public is given ample time to digest the surprising move taken by the RBI. For starters, the 2000 notes would still continue to exist as a legal tender in the economy. This time the withdrawal of these notes was announced by an RBI statement, giving the public an approximate of 4 months to get their notes exchanged.
Now, moving to the aim of the government and the RBI behind these surprises. The main objective of the demonetization process was to curb the black money existing in the economy and curb this money being used for illegal activities.[8] While no such intention is seen this time. RBI’s main aim for withdrawing these currency notes is two-fold. Firstly, the availability of these notes in adequate quantities in the economy thus fulfilling the objective of introducing them in the first place. Secondly, the decision is taken in aid of the ‘Clean Note Policy” which aims to provide cleaner notes to the public.
IMPACT OF THE WITHDRAWAL ON THE ECONOMY
The Governor of the Reserve Bank of India (RBI), Shaktikanta Das, stated on Monday that the consequences of this announcement to withdraw the Rs 2,000 notes on the economy would be “very marginal” since they only make up 10.8% of the amount of currency in the flow. According to him, the RBI continuously checks the system’s liquidity in terms of its availability. Thus, despite difficulties in the world’s financial markets brought on by the conflict in Ukraine and the bankruptcy of certain banks in industrialized nations, the value of the rupee in India has remained constant.
The economy and daily activities of people may be impacted instantly and over time by the withdrawal of 2000 currency notes. The lack of such high denomination currency notes may initially cause an inconvenience in transactions that use cash while over the time people and companies would have to get used to them. Sectors that have historically relied on the use of cash include the retail sector, property management, and agribusiness.
Additionally, the withdrawal could motivate people and companies to switch to electronic payments, enhancing transparency and lowering dependency on cash. For people who have little knowledge about online services or are not experienced with methods of digital payment, it could cause difficulties. In such situations, providing diverse and readily available solutions becomes essential. The financial stability and reserves of the financial system would be more severely impacted. There would be no effect on the deposits if the notes worth 2,000 were swapped for ones worth less.
The unexpected withdrawal of the currency notes might cause monetary distress. There may be economic turbulence if a note is suddenly withdrawn. A decline in GDP rates well as inflation as measured by the consumer price index (CPI) was seen in 2016 as a result of the surprise. However, because lower-denomination notes are widely available and the number of online payments is increasing, the interruptions are expected to be much less obvious this time. Smaller companies that rely heavily on cash may see both a lift and a negative effect as a result of customers trying to burn through their stash of bills by buying consumer goods.
SUGGESTIONS AND CONCLUSION
The RBI’s notification left the whole country stunned fearing that they might have to face the previous hardships again. While the RBI governor guaranteed that this withdrawal was nothing like the previous demonetization as the same was analyzed in the paper how the two are very different. And so, the impact that the demonetization had on the nation is nothing like the impact this withdrawal will have. As 500 and 1000 notes comprised nearly 89% of the cash flow of the nation, 2000 notes comprised not even half. Keeping in mind all the other factors, it can be concluded that the actual impact on the nation would be meager as compared to demonetization. It might impact the overall GDP and thus the economic growth of the country but not to the extent that the demonetization did. Moving towards a cashless economy and increasing the security systems on the existing currency notes would help the nation for any future surprises as could be thrown by the government or the RBI. As it is seen, 2000 currency notes were introduced in the year 2016 and now they are being withdrawn in 2023, having a very short life span which may in a long-term lead to uncertainty in the nation and might affect the international value of the currency.
Vvanshika Singhal
National Law University Odisha
[1] Reserve Bank of India Act, 1934 , (1934).
[2] Sudeep Vijay Limaye, How currency plays a role in spread of contagious diseases – need for clean currency, 20 SAMVAD 34 (2020).
[3] Siddhartha Chattopadhyay & Sohini Sahu, A simple model of currency notes withdrawal, 08 Theoretical Economics Letters 3196–3202 (2018).
[4] Amitabh Dutta & Kishore Kulkarni, Cash shortages and black money: A look at India’s 2016 demonetization effect, one year later, 2 International Review of Business and Economics 1–6 (2018).
[5] The specified bank notes (Cessation of liabilities) ordinance, 2016, PRS Legislative Research (2023), https://prsindia.org/billtrack/the-specified-bank-notes-cessation-of-liabilities-ordinance-2016 (last visited Jun 12, 2023).
[6] Vivek Narayan Sharma (Demonetisation Case-5 J.) v. Union of India, (2023) 3 SCC 1
[7] Reserve Bank of India Act, 1934 , (1934).
[8] E. Daniel Raj, A study on impact of demonetization of currency in indian banking scenario, 6 International Journal of Emerging Research in Management and Technology 108 (2018).