The Reserve Bank of India (RBI) on Friday announced that the Rs 2,000 currency note would be phased out of circulation by September 30. Many on social media and elsewhere were quick to call the move similar to the 2016 demonetisation. However, this gradual phasing out of currency should not be confused with demonetisation. Currency withdrawal and demonetisation are two different processes and both have a long history in the country.
The Rs 2,000 note was introduced in 2016 after the demonetisation of Rs 500 and Rs 1,000 notes. Printing of the Rs 2,000 note had already ceased in 2018-19, and now the RBI has decided to withdraw it from circulation as smaller denomination notes are available in sufficient quantities. The decision to withdraw currency has many precedents. In the last 76 years, the central bank has on several occasions demonetised or withdrawn currency notes.
According to RBI, Paper Money in India traces its origins to the late eighteenth century with the issuance by private banks as well as semi-government banks (the Bank of Bengal, the Bank of Bombay, and the Bank of Madras alluded to as the Presidency Banks.
The Paper Currency Act of 1861 gave the British government in India the exclusive authority to issue currency notes, ending the issuance by private and presidency banks. Sir James Wilson played a crucial role in shaping India's paper currency system. After his death, Samuel Laing made significant modifications to Wilson's proposals. The British government in India issued currency notes until the establishment of the Reserve Bank of India in 1935. The one rupee note was reintroduced as a coin-like note during wartime in 1940.
The government of India brought out the new design Rs 1 note in 1949 which continued to be issued by the government until 1994.
Also Read: What RBI's Withdrawal Of Rs 2,000 Notes Mean For Economy, Equity Market And Banks
The Demonetisation of 1946
On January 11, 1946, the government declared Rs 500, Rs 1000, and Rs 10,000 notes as illegal tender from the next day. The objective was to combat black marketing, but it resulted in shock, long bank queues, and challenges for the middle class. Old notes were sold at reduced prices, causing financial distress. There was also a rumor about demonetising Rs 100 notes, causing panic among the public.
According to a paper by Syed Saleha Javed published in the European Journal of Molecular & Clinical Medicine in 1946, the pre-independence government banned high-denomination notes to curb black money. Although there were concerns expressed by then RBI Governor Chintaman Deshmukh and the Indian National Congress Party, the ban collected an estimated value of 47 crores.
He writes, "Though there were incidents of distress, exercise did not inconvenience the majority as it involved only a minuscule percentage of money in circulation."
The Demonetisation of 1978
In 1978, the Janta Party government, led by Prime Minister Morarjee Desai, demonetised the Rs. 1,000, Rs. 5,000, and Rs. 10,000 currency notes. According to the paper, the public had three days to exchange their old notes and while the government declared it a success, the former RBI Governor IG Patel expressed dissatisfaction.
The demonetisation was seen as politically motivated rather than a necessity. As the banned denominations were of higher value, they did not make up a significant portion of the money in circulation, the paper noted.
The Reserve Bank of India’s (RBI) history (third volume) details how things happened.
The story goes like this. On January 14, a senior official from the chief accountant's office in RBI was informed about the government's decision to demonetise high-denomination notes and was tasked with drafting the ordinance. The drafted ordinance was then sent to President N Sanjiva Reddy for approval. The policy decision was announced through All India Radio's news bulletin, informing the public about the closure of banks and treasuries on January 17.
According to a 1978 India Today article, the move was aimed at freezing the secret funds of politicians, particularly the Congress party led by Indira Gandhi. Prime Minister Morarji Desai stated that the party had been spending money excessively, while Gandhi denied the allegations, claiming that even a ten-rupee note was a luxury for her.
Note Withdrawal of 2014
On January 22, 2014, the RBI announced its decision to withdraw all banknotes issued before 2005 from circulation. Starting from April 1, 2014, the public was required to approach banks for exchanging these notes, with banks providing an exchange facility until further notice.
The reason for the withdrawal was that the currency printed before 2005 had fewer security features compared to the banknotes printed after that year. To assist in identifying the currency issued before 2005, the RBI stated that these notes did not have the year of printing on the reverse side.
Also Read: 'Ghost Of Demonetisation Back To Haunt India': Oppn Hits Out At BJP After Rs 2,000 Notes Scrapped
The Demonetisation of 2016
On November 8, 2016, Prime Minister Narendra Modi announced the demonetisation of Rs 500 and Rs 1,000 currency notes as a measure to combat corruption, counterfeit currency, and black money. The sudden decision aimed to promote a shift towards a cashless economy and increase transparency in financial transactions. People were given a limited period to exchange the old notes or deposit them into their bank accounts.
The effects of demonetisation in India have been mixed.
By withdrawing high-denomination notes from circulation, demonetisation has made it more difficult for counterfeiters to create fake currency.
In a paper published in 2018, the Reserve Bank of India (RBI) calculated that 99.3 per cent of the scrapped notes came back into the formal banking system.
When demonetisation was announced, the total value of “specified bank notes”, was Rs 15.41 lakh crore. Out of that, Rs 15.31 lakh crore has come back, according to the RBI’s annual report for 2017-2018.
“The processing of SBNs has since been completed at all centres of the Reserve Bank. The total SBNs returned from circulation is Rs 15,310.73 billion [Rs 15.31 lakh crore],” the report noted.
It meant that a little over Rs 10,000 crore is what didn’t come back from circulation.
“An amount of Rs 107.20 billion, representing the value of SBNs which has not been paid on June 30, 2018 and was forming part of liability head ‘Notes issued’, has been removed from balance of ‘Notes issued’ and transferred to specific head created for the purpose under ‘Other Liabilities and Provisions’,” the central bank said.
May 19, 2023: Rs 2,000 Withdrawal
RBI on Friday announces the withdrawal of Rs 2,000 notes as part of the "Clean Note Policy.' However, the central bank said the notes would remain legal tender and people can exchange or deposit the Rs 2,000 notes in their bank accounts by September 30.
The RBI has directed all banks to stop issuing the notes immediately. "Exchange of Rs 2,000 banknotes into banknotes of other denominations can be made up to a limit of Rs 20,000 at a time at any bank starting from May 23, 2023," the RBI statement further said.
Congress leaders have said that the current situation could lead to another catastrophic event similar to the demonetisation exercise of November 8, 2016, where the government invalidated all Rs 500 and Rs 1,000 banknotes. However, according to analysts and economists, it is expected to be less disruptive as a lower value of notes is being withdrawn over a longer period of time.