RBI Withdraws Circulation of ₹2,000 Notes: A Consequentially Insensitive Policy

The reading of this announcement has to be seen with respect to its political economy implications.

In a sudden decision, the Reserve Bank of India (RBI) announced a withdrawal of its Rs 2,000 note from circulation with immediate effect. The denomination will remain to be a legal tender, meaning one can go change the mentioned denomination to any other currency denominations at a bank, or even make deposits using the same denomination up until 30 September.

There is, however, a limit of Rs 20,000 (a maximum of Rs 20,000 can be deposited or exchanged using Rs 2,000 notes).

“The total value of these banknotes in circulation has declined from Rs 6.73 lakh crore at its peak as on 31 March 2018 (37.3% of notes in circulation) to Rs 3.62 lakh crore constituting only 10.8% of notes in circulation on 31 March 2023," the RBI said. The apex bank also said that “the objective of introducing Rs 2,000 notes was also met once banknotes in other denominations became available in other quantities.”

Questioning the Logic and Motive?

For those with a traumatic memory recollection of 2016’s demonetisation announcement (which banned 80% of the money supply circulating in the form of Rs 500 and Rs 1,000 notes), this particular RBI announcement may in theory seem to offer people time, options, and reason for depositing/exchanging the denomination in question.

But, look at it this way, what if a person or a business firm that operates largely on cash-based reserves has lakhs of Rs 2,000-based currency reserves (and most firms in India still do, particularly in a largely unorganised economy to pay up for labour charges/working capital needs).

That firm or individual will now have around 130 days or so to make scores of daily visits (employ different people to do the same) to a bank just to change/deposit these notes (given only Rs 20,000 can be changed/deposited daily, you will see those with large sums employing more people just to do this).

Also, those operating their business still reliant on cash, say in real estate or property-related transactions, the announcement will surely cause significant trouble (given more than 50% of their everyday business is still large cash-reliant). I am guessing that the announcement will also result in a difficult quarter for much of the real estate and construction business sector from hereon (and also other cash reliant business).

In a ‘jobless-poor investment’ growth trajectory, how does the timing of this policy appeal to sound economic policy or thinking?

Furthermore, somewhere, the daily limit of Rs 20,000 allowed for exchange/deposits of Rs 2,000 notes seems to be have been announced based on the need to also ‘monitor’ the rate and scale of deposits made by account holders carrying large sums of Rs 2,000 notes. This might give ammunition to centralised agencies (captured by the Narendra Modi-Amit Shah double engine) to specifically target certain businesses, individuals, or the political opposition.

So, while in theory, and on paper, all of this may appear to sound fine and a small “RBI monetary policy measure”, the reading of this announcement has to be seen in the context of its timing and with respect to its political economy implications, too.

Note how the RBI announcement came a few days after the Karnataka election results (where the BJP performed poorly) and even today, this was notified after Friday’s stock market hours had closed for the day to avoid any immediate spillover effect on the financial markets (or cause any panic amongst investors).

The deadline for exchanging/depositing the Rs 2,000 note denomination has also been kept as 30 September, which is just two months away from several state Assembly elections (giving enough reason to believe the political or electoral motivations of the government in asking the RBI to announce this now). I have previously argued  how the timing of demonetisation announcement too had kept the UP elections in mind, seeing the move more as a political action than an economy policy measure.

There are also serious questions about ‘state capacity’, and the concerns of the new policy's implementation from an already stressed public-sector bank system (its bureaucracy), which makes the executive discharge of any such ‘centralised’ announcement difficult.

Consequentially Insensitive Policymaking

The political economy of the Modi government and its institutive functioning has been discussed at length in the recent past (this author has argued and spoken at length about an environment of intellectual bankruptcy that shapes much of the current government’s policymaking-advising space). The government seems to hardly have any cohesion or clarity in its macroeconomic or fiscal vision.

Look at another recent instance, for example.

Only a couple of days ago, the Union Finance Ministry announced a 20% TCS (Tax Collected at Source) charge for all international credit transactions abroad from 1 July. The government said that the decision was taken in consultation with the RBI. The move, notified on Tuesday night, was surely to impose a ‘significant compliance burden on both card-issuing banks and consumers’.

More importantly, the administrative cost of tax-monitoring all international credit card transactions may simply be ‘not possible’ and appears to be a consequentially insensitive announcement. From a simple cost-benefit exercise on executive action, the announcement made little sense.

The notification, naturally, resulted in an uproar on social media around the announcement and the government initially refused to budge. However, on Friday, the Central government announced that to “avoid any procedural ambiguity, it has been decided that any payments made by an individual using their international debit or credit cards up to 7 lakh is exempted from the LRS limits, and hence will not attract any TCS”.

Could the government have not thought about these considerations before making the announcement and riling people up?

This isn’t one isolated instance too. Much of the economic policy-making space under the current government’s decision-making architecture suffers from a lack of instituting any critically reflective feedback loop or even learning from its own past mistakes.

From demonetisation in 2016, to the ad-hoc introduction of the GST, the poor implementation of the IBC (Insolvency Bankruptcy Code), the introduction of CAA-NRC, the ‘farm laws’-triggered one of the largest mass protest movements seen in recent decades, to the ‘codification’ of labour laws – all signal a common, worrying trend in the political economy structure of the current government’s governmentality. It practises centralised, consequentially-insensitive, ad-hoc, knee-jerk policies and laws, without making any efforts to consult (or seek advice) from domain-knowledge experts, or have white papers in place to learn (in fact) from its own experiences of past-implementation failures.

‘Fare Thee Well’ or ‘Fare Thee Forward’?

A consequence-sensitive (‘fare thee well’) approach to policymaking warrants the agency of the state to consider the instrumental processes involved in implementing the policy and the likely outcomes culminating from its final execution. We have seen nothing like this over the last nine years of government action. From a reasoning perspective (and in a class of public policy action):

• A fare thee well or ‘consequentially-sensitive approach’ to public policymaking accommodates a process of ascertaining both, a set of culmination outcomes (representing only the final outcomes seen without taking any note of the administrative process of getting there) and a set of comprehensive outcomes (taking note of the agency-led administrative processes via which the culmination outcomes come about). Any good public policy, in its design, is observed or seen to be taking take such a method.

• A fare thee forward or ‘consequentially-independent’ approach in policymaking may seem to be concerned with neither of these two outcomes (culmination or comprehensive). A badly designed policy/law or notification change in existing law/policy is seen to take such an approach, in order to maximise economic efficiency while imposing high social costs, resulting in market and government failure. The implementation cycles of demonetisation and the GST (and others spoken of) reflects a benign, indifferent outlook towards those responsible in implementing the cycle (the agency or the administrative body) and those directly affected by the policy (the people or recipients/citizenry concerned). 

Unfortunately, as mentioned recently, going into the election of 2024, we might see more of such fare thee forward (consequentially insensitive) policy action by the current government, guided more by ‘political or electoral’ motives (to either consolidate or control power) and less by sound economic principles or consequentially sensitive reason. The craft of policymaking in India must seek to align economic incentives in a way that allows the agency and the people to work in a mutually cooperative way and collectively share the benefits that accrue.

(Deepanshu Mohan is Professor of Economics and Director, Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, O P Jindal Global University. This is an opinion article and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)