Why Are Rs 2,000 Notes Not Being Printed

Published: April 18, 2018 16:37 IST
The country is suddenly faced with a new crisis - the crisis of empty ATMs. We witnessed the outburst of the Chief Minister of Madhya Pradesh the other day who suspected that it was a conspiracy against the government with some people deliberately hoarding currency notes of Rs 2,000 denomination. Does he have proof of it? If he does, then why does he not act against such hoarders? Some explanation has come now from the Finance Minister and officials who work with him - they have assured the people that there is no cash crunch but there has been some unexpected spike in demand for cash which has led to this problem in some parts of the country which would be solved soon.

Let us examine the issue in some detail. According to the RBI, its currency management infrastructure consists of a network of 19 issues offices, 4,034 currency chests and 3,707 small coin depots of commercial, cooperative and regional rural banks spread across the country. The RBI follows the hub-and-spoke model for the distribution of bank notes. Under this arrangement, fresh note remittances are sent to larger currency chests to meet the currency needs of a designated area like a district. This is described as the hub. From these hubs, notes are supplied to smaller currency chests in the vicinity. These are the spokes.

The RBI follows an econometric model to estimate the likely demand for currency in a future year. This is generally based on expected real GDP growth, the rate of inflation and the denomination-wise disposal rate of soiled notes.

So the distribution centers are in place, the distribution model is in place and a scientific estimation method of future needs is also in place. So what is the reason for the present crisis?

The shortage of cash in the ATMs is not confined to a particular region. It is fairly widespread. According to reports, shortages were reported from states such as Delhi, Uttar Pradesh, Telangana, Andhra Pradesh, Maharashtra, Gujarat, Chhattisgarh, Bihar, Madhya Pradesh, Karnataka, Rajasthan and Jharkhand. This covers almost the entire country. And the shortage has been with us for some time: upto two weeks in certain areas.

According to Finance Ministry officials, this situation has arisen on account of some "unusual demand" for cash in recent weeks. The nature of the unusual demand and the reason for it has not been clarified. If it is seasonal, then it why was not anticipated? If it is not seasonal, then it calls for immediate investigation.

Currency notes of Rs 1,000 denomination were abolished as a result of demonetization on November 8, 2016. Surprisingly, currency notes of Rs 2,000 denomination replaced them. It was pointed out even then that this arrangement did not make sense. If the government was convinced that a high-denomination currency note of Rs 1,000 helped the hoarders of black money then would it not become easier for them to hoard notes of the denomination of Rs 2,000? The government offered no explanation for this then. It appears that this is exactly what may be happening. According to an RBI report, the share of the newly-introduced Rs 2,000 bank notes in the total value of bank notes in circulation was 50.2% at the end of March 2017. In terms of numbers, it was 3,285 million pieces. According to another report, there has been a sharp decline in the supply of Rs 2,000 bank notes to the currency chests. According to a newspaper report, the RBI stopped supplying these notes from July last year. Similarly, the value of currency in the currency chests has also declined sharply.

According to a Finance Ministry official, the decision to stop printing new Rs 2,000 notes was taken a few months ago. He does not clarify whether notes of other denominations are making up this shortfall. Why has the government stopped printing the bank notes of Rs 2,000? Is it part of some bigger plan of which we are not aware? Is it because most of these notes are being hoarded by black money holders and have gone out of circulation? For a government which is known to take whimsical decisions, I will not be surprised if suddenly one day they are demonetized.

The following questions are pertinent and the government must answer them:

1. What is the reason for the sudden spurt in demand?

2. If it is seasonal, then why was it not anticipated? If it is a one-time hike, then what could be the reason for it?

3. Are Rs 2,000 bank notes being hoarded and if so, what is the government doing about it? 

4. Why has the government stopped the printing of Rs 2,000 notes - and since when? Is it likely to phase out its circulation?

5. Why does the RBI not take into account the regional requirements of bank notes and plan accordingly? Why do we have a situation today where we have a glut in some parts of the country and shortages in some other parts?

Anecdotal evidence suggests that many clients have been turned away by bank branches for want of cash in the branch and asked to come another day. The people are aware pf and greatly concerned at the deteriorating health of even the leading banks of the country. An amount of rupees 2.72 lakh crores has been written off by public sector banks during the last four years. The names of the beneficiaries are not known. The non-performing assets (NPAs) of banks have been allowed to increase exponentially during the last four years and stand at a staggering figure of around 9 lakh crores today. If the new norms of the RBI are followed, this may go up by another few lakh crores.

The government has much explaining to do. The people of India have not given it the mandate to destroy the banking system of the country and ruin its economy. 

(Yashwant Sinha is a senior BJP leader and former Union Minister of External Affairs.)

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