Rs 2,000 Note Withdrawal: Two Reasons Former CEA Krishnamurthy Subramanian Thinks It's A Good Move

Former Chief Economic Advisor to the Government of India, Krishnamurthy Subramanian, put out a short post on Twitter stating why he thought the Centre's action to withdraw Rs 2,000 notes from circulation was a 'good move'.

Here is a summary of his post:

1. Curbing Hoarding

Numerous instances of cash hoarding involving Rs 2,000 notes have been uncovered during raids. With the declining use of the Rs 2,000 note as a medium of exchange, it is primarily being utilised for hoarding money.

Applying the 80-20 rule, it is likely that 80 per cent of individuals legitimately storing this money in Rs 2,000 notes account for only 20 per cent of the overall value. Conversely, the remaining 20 per cent of those using Rs 2,000 notes for storage purposes may represent hoarders accounting for approximately 80 per cent of the value, equivalent to around Rs 3 lakh crores.

2. All of this comes at minimal inconvenience for common people:

The withdrawal of Rs 2,000 notes will not significantly inconvenience the general public, for the following reasons:

(i) Declining Usage: Currently, Rs 2000 notes constitute only 10.8 per cent of Currency In Circulation (CiC) and are not extensively used as a medium of exchange.

(ii) Rise in Digital Payments: The adoption of digital payment methods for economic transactions has witnessed a significant surge. As a result, the role of physical currency notes, particularly the Rs 2,000 note, has significantly declined.

(iii) Substitution with Rs 500 Notes: The Rs 500 note, in conjunction with digital money, can effectively substitute the minimal usage of the Rs 2000 note as a medium of exchange.

(iv) Future Digital Transaction Growth: According to a BCG report, digital transactions are projected to multiply threefold by 2026. This trend further reduces the necessity for the Rs 2000 note as a medium of exchange in the coming years.

(v) Continuity of Legal Tender: RBI has confirmed that the Rs 2,000 note will remain legal tender. Subramanian adds in brackets: "(even beyond 30-Sep-2023 is my current understanding though RBI may need to clarify this)".

Overall, a good move, says the former CEA.