Withdrawal of INR 2,000 notes will have no perceptible effect on economy, says Panagariya

NEW DELHI — The RBI’s decision to withdraw INR 2,000 currency notes from circulation will not have any ‘perceptible effect’ on the economy as any such notes returned will be replaced by either equivalent cash in lower denomination notes or a deposit, former NITI Aayog Vice Chairman Arvind Panagariya has said.

Panagariya further said the likely motive behind this move is to make the movement of illicit money more difficult.

” We will not see any perceptible effect on the economy. Any currency in INR 2,000 notes returned will be replaced by either equivalent cash in lower denomination notes or a deposit. So money supply will not be impacted,” he told PTI.

Panagariya noted that INR 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.

The Reserve Bank of India on Friday announced withdrawal of INR 2,000 currency notes from circulation, and existing notes in circulation can either be deposited in bank accounts or exchanged by September 30.

The bank notes in INR 2,000 denomination will continue to be a legal tender, the RBI had said in a statement.

Asked whether the public will face inconvenience due to this move, the eminent economist said many citizens probably have no INR 2,000 notes since few transactions take place in those notes.

” For those who do, inconvenience will not be beyond an extra trip to the bank. Even that can be avoided by exchanging INR 2,000 notes when visiting the bank for some other transaction,” he said.

Asked is there is a need for INR 1,000 currency notes, Panagariya said,”As of now, I do not see a need to issue INR 1,000 notes as citizens have become used to transact in notes of INR 500 or lower denomination.”

Explaining further, he pointed out that per capita income in the US in 2021 was USD 70,000 and its highest denomination note is USD 100. This gives ratio of per capita income to the highest denomination note at 700.

In India, per capita income in 2021 was approximately INR. 1,70,000.

“For the same ratio of per capita income to the highest denomination note as in the US, our highest denomination note would have to be INR 243. So, INR 500 note as the highest denomination note would seem to be about right for us, given that we are still more of a cash economy than the US,” he said.

The RBI started printing INR 2,000 notes in November 2016 after Prime Minister Narendra Modi scrapped high-value INR 1,000 and INR 500 notes overnight.

He opined that one lesson of November 2016 demonetization was that tracing black money is incredibly difficult.

“The most you can do is to make future illicit transactions more difficult by eliminating high denomination notes,” he said.