One noticeable trend that has emerged since demonetization has been the frustration of ordinary people in finding willing takers for the new Rs.2,000 note. At this point, it is almost as unpopular as the old Rs. 500 note for hawkers, vegetable sellers and shopkeepers. Accepting a Rs. 2,000 note is accepting a burden: the burden of finding someone else who will take the note from you and give you change.
But there is another question that the Rs. 2000 note raises. A few days after the new note was introduced, a junior official at the Kolhapur Zilla Parishad was caught accepting a Rs. 35,000 bribe - consisting of 17 crisp new Rs. 2000s. In 2013, the country Sweden began a demonetization effort, and the first step it took was removing the highest denomination bill, the 1,000 krona note (worth approximately $110). This made it more cumbersome to conduct large transactions in cash, and Sweden noted that demand for the next highest note (500 krona) also fell by 60% after the move. By 2014, cash use had fallen considerably, and today most public infrastructure, including buses and trains, have card slots and only take cards. Many small shops voluntarily have signs saying, 'we don't take cash', preferring digital. While multiple countries, including Sweden's European neighbors, Finland, Belgium and Italty have tried demonetization, Sweden is the only country where cash holdings have actually reduced after the effort.
Consider in comparison, India's introduction of the new Rs. 2,000 note - incidentally, the Rs. 2000 note's PPP (purchasing parity) with the dollar is $106. This is a significant denomination in India, and retains high convenience for bulk cash transactions while making change difficult for ordinary folk. A sheaf of Rs. 2000 notes is high value and easily transportable.
If the government wanted to curb the 'suitcases of cash' model of doing business and reduce illicit cross-border cash flow, introducing an even higher denomination note is arguably not a good move.
Another aspect is the size of the note. The economist Peter Garber had noted that besides reducing the denomination of the highest currency, the physical size of the note is also a factor for smugglers and the black market - bigger notes are harder to move around easily. "The iron law for subverting illicit economies is as follows," he wrote, "a percentage increase in physical note size is equivalent to the same percentage increase in the price level." But the 2,000 note is smaller than the currency notes it has replaced.
Options to cash
The exhortation by the Indian government to move towards digital cash is a good one - cash does increase fraud, the black money economy, and aids illegal activity like the drug trade and terrorist groups. But people need many more options at scale that what is currently, easily available to successfully move out of cash. Solutions like PayTM and digital wallets and debit/credit cards are primarily available today to middle class and urban Indians.
Digital wallets require a smartphone, which is a big barrier for many millions of Indians. For small merchants, card transaction fees dent their profits. To make cash less attractive, the government needs to make low-cost card and card transaction options available with high penetration across urban and rural India. Unless this happens at high speed, using cash will remain attractive - and the existence of the new 2,000 note does not help matters.
Photo: Aish Gaba/Twitter
