6 reasons why withdrawing ₹2,000 notes overall good move, explains former CEA

Dr Krishnamurthy Subramanian, who was the chief economic advisor from 2018 to 2021, said the move to withdraw ₹2,000 notes is overall a good one.

As the use of the denomination declined, it is being primarily used to hoard money, Dr Subramanian wrote as he gave six reasons why the move is important. The Reserve Bank of India on Friday announced the withdrawal of ₹2,000 currency notes from circulation triggering a political backlash. The ₹2,000 notes were introduced in November 2016 when the old notes of ₹500 and 1,000 were banned.

Here’s what former CEA Dr Subramanian said:

1. In several raids, ₹2,000 notes were uncovered proving that the currency was being used primarily for hoarding money. “The 80-20 rule suggests that even if 80% of the people are legitimately storing this money in ₹2000 notes, they are likely to be storing only 20% of the overall value. 20% of those who are storing the money in ₹2000 notes are likely to be hoarders who may account for 80% of the value (~3 lakh crores),” Subramanian said.

2. The move will not inconvenience the common people as ₹2,000 notes are not being used in huge numbers for economic transactions.

3. The role of physical currency notes, especially ₹2,000 notes, declined as digital payments are being used in huge numbers.

4. The ₹500 note (together with digital money) can be used as a medium of exchange to “seamlessly substitute even the minimal use of ₹2000 note for this purpose”.

5. “Digital transactions are expected to multiply 3x from now to 2026 (BCG report), thereby minimizing the need for the ₹2000 note as a medium of exchange even more in coming years,” Dr Subramanian said.

6. “Most importantly, as RBI has said that the ₹2000 note will continue to be legal tender (even beyond 30-Sep-2023 is my current understanding though RBI may need to clarify this), genuine folks holding the ₹2000 note can exchange even beyond 30-Sep-2023,” Dr Subramanian said.