India Will Scrap 2,000 Rupee Notes, Echoing 2016 Demonetization

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The move to retire 2,000-rupee notes, worth $24, has triggered bad memories of a similar campaign in 2016. It has also left some businesses short of change.

By Sameer Yasir and Mike Ives

Sameer Yasir reported from New Delhi, and Mike Ives from Seoul.

Indians have been filing into gas stations, jewelry stores, fruit stands and any other businesses that still accept soon-to-be-withdrawn 2,000-rupee notes, each worth about $24.

The race to spend India's biggest bill has been on since its central bank announced this month that they would be removed from circulation by early fall.

India's vast economy remains heavily reliant on cash, and many businesses have welcomed the surge in traffic, even if it has left them a bit short of change. Economists say retiring the big bill may help fight corruption, bring workers into the formal economy, improve tax collection and accelerate India's push for digital payments.

But for some consumers, the move has dredged up unpleasant memories of 2016, when Prime Minister Narendra Modi's sudden ban on large notes left them without enough cash for basic transactions. In an economy that is driven by rural and informal workers, some do not own bank accounts — or trust the government's economic policies.

"It is better to buy gold or silver and keep it," said Meenu Kevat, 32, a cleaner in New Delhi who does not have a bank account and hoards her cash earnings in a tin box. After the recent ban was announced, she said, it took her four days to cajole shopkeepers into converting 12 of her 2,000-rupee notes into smaller dominations.

"I don't trust cash now the government can do anything it wants," Ms. Kevat said, standing outside a grocery store in south Delhi. "It can cancel a note anytime, no matter how small or big."

In 2016, Mr. Modi's government announced without warning that it was withdrawing India's two largest denominations at the time — the 500- and 1,000-rupee bills — to expose and penalize people who held huge amounts of money that could not be accounted for.

After that sudden demonetization, A.T.M.s were overrun, and some retail businesses came to a standstill because customers were hoarding the little cash they had. And because the withdrawn notes amounted to about 86 percent of the cash in circulation at the time, the government decided to introduce the 2,000-rupee bill as a "remonetization" measure to ease the currency crunch.

So far, the move to withdraw the 2,000-rupee bills from circulation is causing far less disruption. That may be because they account for less than 11 percent of the currency in circulation. India's 1.4 billion citizens also have until Sept. 30 to either spend the bills or exchange them at banks. (The bills will remain legal tender after that, but many Indians are taking the deadline seriously, because they worry that government policy could change.)

In the long term, removing the 2,000-rupee bills will probably help with a gradual, positive move toward formalization and transparency, said Phyllis Papadavid, an economist who studied the 2016 demonetization program. More workers should be able to formally register and claim benefits, for example, and there will be higher barriers to tax evasion.

"I can't think of any aspect of an economy that is worse off by digitalization or formalization, because, basically, you have better usage and management of information, and accountability," said Ms. Papadavid, the director of research and advisory at Asia House, a research outfit in London.

In the short term, though, the cash rush has caused a few headaches.

Indian news media outlets have reported on a nationwide surge of foot traffic in recent days at businesses that are willing to accept 2,000-rupee bills.

"People have a habit of either keeping cash in big denominations or gold at home," said Vicky Bansal, a jeweler who said his shop in New Delhi had been especially busy since the announcement. "So if they can't keep 2,000-rupee notes, they’ll keep jewelry."

At gas stations across India, nearly 90 percent of purchases have been made in 2,000-rupee notes since the announcement, up from the normal level of 10 percent, Ajay Bansal, the president of the All India Petroleum Dealers Association, said in a statement. Because many customers try to use the bills to buy as little as 100 or 200 rupees worth of gas, he added, "outlets are extremely short of change across the country."

At a fruit stand in south Delhi, the proprietor, Rizwan Ahmad, said that he had stopped accepting 2,000-rupee bills for the same reason.

"It took me three days to pay back the change I’d borrowed from a tea seller, a barber and a pharmacist," Mr. Ahmad, 33, said outside his fruit stall in a crowded bazaar. Now he has about $400 worth of 2,000-rupee notes that he will need to unload before the September deadline.

Mr. Modi's government has characterized its withdrawal of 2,000-rupee bills as a logical step in economic policy. The bills "were hardly used, so economic activity will not be impacted," Shaktikanta Das, the governor of India's reserve bank, told reporters last week.

But some critics have called the policy ham-handed, saying that it has shaken consumer confidence and damaged the rupee's integrity. A few have also noted that while the 2016 campaign helped the government claw back nearly all of the withdrawn bills, it did not eliminate unaccounted-for cash, known as black money, from the economy.

The policy has even been criticized by people in other South Asian countries where businesses accept Indian rupees. In Bhutan, for example, 2,000-rupee notes are now "as good as worthless" because they cannot be exchanged, Tenzing Lamsang, a prominent newspaper editor there, wrote on Twitter last week.

India has talked about making the rupee a global reserve currency, he added. "However, if your own neighborhood cannot trust your currency and the erratic demonetizations, then good luck getting the world to accept it," he wrote.

In New Delhi recently, Shanker Sharma, a gas station manager, expressed a similar sentiment. "People no longer trust the government when it comes to cash," he said.

To cope with an influx of 2,000-rupee notes, he has posted signs warning customers not to fill their tanks with 50 rupees, or about 60 cents, worth of gas and expect to receive change. When some do anyway, he said, "I have to shoo them away."

Sameer Yasir is a reporter based in New Delhi. He joined The Times in 2020. @sameeryasir

Mike Ives is a general assignment reporter. @mikeives