In a move seemingly aimed at curbing black money and to prevent circulation of fake notes, the Reserve Bank of India (RBI) on Wednesday said that it will withdraw all currency notes printed and issued before 2005 after March 31. Demonetisation is an accepted global central banking practice.
By definition, demonetisation is the act of removing a currency unit of its value. In January 1946, Rs 1,000 and Rs 10,000 banknotes were demonetised. Seven years after Independence, the government re-introduced higher denomination currency notes of Rs 1,000, Rs 5,000 and Rs 10,000.
These were again demonetised in 1978 as an attempt to clamp down on illegal cash transactions.
Strictly by this definition, the RBI’s move to withdraw old series currency notes cannot be categorised as a demonetisation exercise. Importantly, it is the government which takes a decision on demonetisation of currency notes, and not the central bank.
Replacing old currency notes with a new series is a regular practice, but in the past these have been executed through banks, more as an administrative measure, rather than an appeal to the public.
There is, however, no ambiguity on the fact that, in India, deals continue to thrive outside the financial system in a bustling cash economy by creating a web of transactions to obscure the sources of slush funds.
Black money is income on which tax is evaded. Various estimates have pegged India’s black economy at around 30% of the country’s gross domestic product (GDP) or about Rs 30 lakh-crore. About a third of India’s black money transactions are believed to be in real estate, followed by manufacturing and shopping for gold and consumer goods.
The RBI has not explicitly spelt out the reasons for the move triggering speculation that this was a step in clamping down on hoarding of currency notes to transact in cash as well as a security measure to prevent the use of counterfeit notes.
The move, even if in a limited way, will help restrict the use of black transactions and act as a disincentive to hoard cash to carry out deals circumventing legitimate banking channels.