Banking Central: Black money threat, widespread fake currency behind cancellation of Rs 2,000 notes

At the tail end of last week, the Reserve Bank of India announced that it would begin withdrawing Rs 2,000 currency notes on May 23. These bills will continue to be accepted as legal money, but people will have until September 30 to exchange or deposit them at specific RBI offices or bank branches.

The government banned the Rs 500 and Rs 1,000 notes in November 2016 to combat an increase in counterfeit money, and the Rs 2,000-denomination notes were launched to remonetise the system.

But why did the RBI decide to take these bills from the market? There can be a few different explanations. First, it makes logical to stop using the denomination that isn't used as frequently as the others. According to data from the RBI, the total value of these banknotes has decreased from Rs 6.73 lakh crore, which represented 37.3 percent of notes in circulation on March 31, 2018, to Rs 3.62 lakh crore, which represented only 10.8 percent of notes in circulation on March 31, 2023. Over time, these notes have decreased in proportion to the overall amount of cash in circulation. So, it made sense to get rid of these notes as quickly as possible.

Second, the use of the Rs 2,000 notes by criminal elements caused problems for the government and tax authorities. According to data from the income tax department, a sizable portion of the black money seized in recent years was made up of these notes.

In a statement to Parliament in November 2019, Finance Minister Nirmala Sitharaman stated that Rs 2,000 notes made up 43.22 percent of the unaccounted cash collected in the fiscal year 2020. The percentage of unexplained currency made up by the Rs 2,000 note decreased from 67.91 percent in the fiscal year 2018 to 65.93 percent in the fiscal year 2019. Although consolidated data for 2020–2022 is not yet available, the pattern is most likely to follow that of the prior years.

If they opt to deposit the money in bank branches all at once, black money holders with a large number of undeclared Rs 2,000 currency notes risk being discovered. But, this group will undoubtedly find a way to avoid paying taxes, which will be difficult. To get around the taxman's eyes, the black money hoarders can try dividing the stock into smaller amounts and depositing it in various accounts.

Nonetheless, the removal of Rs 2,000 notes will assist to reduce the black money threat in the short term and will, at least temporarily, undermine the fake currency movement.