21 May 2023

Why Rs 2000 Notes Have Been Banned And How It Will Impact People, Businesses And Economy?

Mumbai: The Reserve Bank of India has announced the withdrawal of Rs 2000 notes. Experts believe that why the government has decided to withdraw the Rs 2,000 note is not yet clear.

On Friday, RBI has said that the notes which are present in the market will remain valid. People can either deposit or exchange these notes in their bank accounts till 30 September. However, maximum of only ten notes of will be changed at a time. Notes can also be changed many times in a day.

Credibility of cash will be reduced

The withdrawal of these notes will reduce the credibility of cash in the economy. A question may arise in the minds of the people that if two thousand rupee notes can be withdrawn, then five hundred rupee notes can also be banned.

But withdrawing Rs 2000 notes from the market will not have the effect similar to demonetisation.

Small scale industries, farmers could be hit

However, the small scale industries who keep currency in denomination of two thousand rupee notes to meet their cash requirements or the farmers who keep their savings in these notes will definitely face problems.

Some experts say cash is used for payment. There can be obstacles in this too. The Indian economy is already in trouble, the unorganized sector is taking a beating, the situation may get worse.

Surgical strike on corruption? 

But BJP leaders have called it a surgical strike on corruption.

Former Bihar Deputy Chief Minister Sushil Kumar Modi has said in a statement to the media, "This is a step taken to fight against corruption. This is a surgical strike on corruption. The black money that people have should come out."

Sushil Modi said, "Two thousand rupee notes are being used in terror funding and other corrupt activities. In such a situation, the intention is to abolish this note completely."

It has been said that big notes are not right for the market. When 500 and 1000 rupee notes were withdrawn, it was argued that this was being done to stop black money. The same logic is being used even after withdrawal of Rs 2,000 notes.

Will it hurt black money?

However, some experts reject the government's argument that it will hurt black money. They say even if black money is banned, even then black earning will continue.

There had been speculations in the past about the withdrawal of the two thousand rupee notes. The demand for its withdrawal was also raised and media reports also said that their circulation in the market was on the decline.

Analysts believe that even if the withdrawal of 2000 rupee note does not affect the large population, it can have an impact on the credibility of the cash.

It will make flow of illicit money more difficult: Panagariya

On the other hand former NITI Aayog Vice Chairman Arvind Panagariya has said that this action has been taken to make the movement of illicit money more difficult.

He said there will be no perceptible effect on the economy. According to Panagariya, money supply will not be impacted because any currency in Rs 2,000 notes returned will be replaced by either equivalent cash in lower denomination notes or a deposit.

Panagariya noted that Rs 2,000 currency notes represent only 10.8 per cent of the cash currently in the hands of the public and probably most of it is being used for illicit transactions. 

However, some economists also point out that  if a person or a business firm that operates largely on cash-based reserves and has large number of Rs 2,000 based currency reserves then such firms will now have to make many daily visits or employ people to change these notes. In a largely unorganised economy, firms usually pay up for labour charges and working capital needs in cash.

Tughlaqi demonetisation drama: Mamata

Opposition leaders have attacked the government over the withdrawal of Rs 2000 currency notes from circulation. West Bengal Chief Minister Mamata Banerjee described it as "Tughlaqi demonetisation drama". Congress has expressed apprehension that it could be the second "notebandi" exercise.

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