The Other Side Of Rs 2,000 'Remonetising' Through A Give-And-Take Approach

The 2,000 rupee note in your wallet, or tijori, is worth just a piece of paper, even though it is officially legal tender.

Legal tender means 2000 is worth 2000 if you exchange it or deposit it in a bank. But the truth is—it’s just a piece of paper if it lies with me, as no one except banks will accept it! It certainly is not demonetisation, but ending the life of this note until it goes completely away from the system.

However, the Sept. 30 deadline makes matters open to speculation. Will the Rs 2000 note continue to be legal tender after Sept. 30?

Technicalities aside, let’s focus on the other side of this coin. This move will remonetise the economy, re-energise businesses, and give the RBI a `hidden’ treasure to help bring down the cost of funds in the system. The economic arguments are the same. They are more or less similar to what happened after the 2016 demonetisation, but on a much smaller scale. However, this is on the assumption that a large portion of the Rs 2000 notes held in the system will come back to banks as deposits.

But let’s first look at the positive side. This move will not inflict any pain on the common citizens of the country. The salaried, the small shopkeeper, the vegetable vendor, the carpenter, your service technicians, and most importantly, the service provided by maids for every household, cleaning vessels and floors, will not be affected. They have moved on; they use UPI through GPay and Paytm. They are all insulated from this move to pull the 2000-rupee note out.

So who will be hit? Hoarders of cash! It’s here that the RBI and the government have given cash hoarders a free run to convert black into white.

No questions asked, no ID proof, and no deposit challans to be filled. You just go to a bank, exchange 10 notes of Rs 2000 each, and walk back with Rs 20,000 worth of lower denomination. This means any person can go from bank to bank over the next four months and convert large sums of cash. So, why worry about depositing money in a bank when these notes can be exchanged and used?

For instance, if a person has Rs 1 crore in the form of 2000 notes, it will take 500 visits to a bank to exchange them into smaller denominations. This can be done in many ways. He can employ people to do this and pay a small service fee for standing in line. Not a big deal at all considering the `no questions’ asked rule.

It may not be possible to get the entire Rs 3.6 lakh crore held in 2000-rupee notes converted into lower denominations. Big cash hoarders have to deploy an army over a period of four months. They may end up making a trade-off between depositing and paying tax for the unaccounted versus conversion into a lower denomination.

It's here that the RBI and the government have given the cash hoarders a `you keep some, give some back to the system’ approach. A tactical move that will bring benefits from the hidden, unaccounted treasure.

So, on Tuesday, if you see long lines outside banks, don’t shed tears.

Muralidhar Swaminathan is Consulting Editor at BQ Prime.