The introduction of a new series of notes in high denominations to replace the old Rs 500 and Rs 1,000 notes that ceased to be legal tender, including a Rs 2,000 currency note, a denomination that has never previously existed in India, is what sets apart the 2016 demonetisation from the last demonetisation in 1978.
The High Denomination Bank Notes (Demonetisation) Ordinance of 1978 (later replaced by an Act in due course of time) demonetised high denomination currency notes of Rs 1,000, Rs 5,000 and Rs 10,000. While the Rs 5,000 and Rs 10,000 currency notes have never made a come back, the Rs 1,000 note was reintroduced only in the year 2000 – that is 22 years after the 1978 demonetisation. The preamble to the 1978 Act had noted that high denomination bank notes facilitate illicit transactions and by getting rid of them, the 1978 demonetisation not only helped to get rid of the unaccounted money already hoarded by individuals but also made it much more difficult to hoard money in the future.
In contrast, after Tuesday’s surprise announcement, the denomination of the highest denominated currency note in India shall actually double from Rs 1,000 to Rs 2,000. Due to the introduction of a higher denomination, it will be possible to carry a larger value of money with fewer notes. The Rs 2,000 currency note will make it possible for huge amounts to change hands in illegal dealings without imposing any logistical challenges. It is possible – some may say, even likely – that the problems of corruption and black money will make a reappearance soon just with Rs 2,000 currency notes instead of Rs 1,000 ones.
In his address Prime Minister asked: “Which honest citizen would not be pained by reports of crores worth of currency notes stashed under the beds of government officer?”
However, with the introduction of the Rs 2,000 currency notes, the corrupt officials will now be able to stash 20 times the value under a hypothetical bed than they would have been able to if the highest denomination in circulation was Rs 100. Had large denominations been eliminated entirely, carrying huge amounts of cash for large bribes or terror funding would have become comparatively more challenging due to the need to deliver the huge volume and weight of small denomination notes required to total upto a big figure.
Not ready to go cashless?
In India, most transactions including some high value ones such as jewellery sales take place using cash rather than electronic payments, allowing for the utilisation of black money and hiding of transactions from tax authorities. The government, and the RBI have been trying to encourage more electronic payments and cashless transactions which create an electronic trail that cannot be hidden from taxman. Eliminating Rs 500 and Rs 1,000 currency notes without the introduction of any new notes would have given an unprecedented fillip to this mission.
It would have made it cumbersome to carry enough cash for any transaction more than Rs 2,000 or so, and thus encouraged the public to adopt greater use of electronic payment systems. With the introduction of Jan Dhan Yojana and the consequent issuance of RuPay cards, the debit card penetration in India is at an all-time high. The RuPay system also ensures that we are no longer reliant on foreign card intermediaries alone. The e-wallets ecosystem in India is thriving as well, with fierce competition between players such as Freecharge, Paytm and PayU Money to acquire more users and merchants on their platform. The recent introduction of Unified Payments Interface has made electronic payments directly between bank accounts much simpler and uses only mobile phones which are now ubiquitous even in rural India.
The government could have incentivised cashless transactions along with the demonetisation by undertaking a publicity campaign for UPI and subsidising Point-of-Sale machines if necessary. The inconvenience of carrying a large number of bank notes would have been the greatest motivator for shifting to electronic payments. If a new currency note had to be introduced for ease of small payments, a new Rs 200 denomination would have done the trick.
While the demonetisation is being praised as a surgical strike on black money, the Modi government seems to have missed the opportunity of a nuclear strike on large value cash transactions entirely.
Sagar Godbole is an associate at Trilegal. Views expressed here are personal.
