With regard to demonetisation of Rs.500, I assume there was no comprehension of its usage. With rising cost of living and inflation, Rs.500 has become a ‘common’ note that is being frequently used, exchanged and converted into small change. However, policy makers probably missed the extent of its usage and reach. Recently, in a meeting on demonetisation, a regional party leader declared that their long standing demand was to ban ‘big’ notes. He went on to explain that ‘big’ note facilitates black money holders to stash away more and more easily. I asked him what is the definition of a ‘big’ note, and did they notice that Rs.500 note lost its ‘bigness’ as it became common.
On the other hand, apart from Rs.500 and 1,000 notes, India does not have any other ‘big’ notes. An essential qualification of a ‘big’ note is to reduce the volumes of cash into smaller packs. As corruption forms and levels increased, black money flow multiplied, rich people were still stuck with Rs.500 and Rs.1,000 notes. In the absence of higher denomination notes, both the black markets and with inflation, common people have been using and continuing to use Rs.500 note. This was not the case in the earlier years.
In the past, when you wanted Rs.500 notes to replace a stack of Rs.100 notes, bank cashiers used to snigger, and it required all your skills and influence to get such a wad. In the last few years, in not more than 5 to 6 years, slowly and steadily Rs.500 became a normal note, in the pockets of common people. Depth of its usage has not been assessed by the Prime Minister, nor his advisors.
Even people, knowledgeable and angry at the growth of black money, do not acknowledge that Rs.500 note is longer ‘big’. Secondly, Rs.500 became a normal note for all transactions of higher volume, between traders, traders and producers, and consumers. Agricultural produce is procured by traders, at agricultural markets, and beyond, through direct cash transactions. Fruit, vegetable and grain farmers insist on cash payments, at a cost, primarily to avoid multiple trips on payments, and also they require cash for their needs and next crop season investments. Traders also find it easier, since it helps them to avoid tax payments. No one wants a paper trail. Even government procurement agencies had to pay on the spot.
According to the data available with the RBI, the number of Rs 500 notes in circulation increased from 1,141 crore pieces between 2014 and 2016, a whopping 38 percent increase over two years. Similarly, the number of Rs 1,000 notes rose 24.5 percent from 508 crore to 633 crore pieces during the period. Both the denominations together witnessed a jump of 33.6 percent over the two-year period. This increase could be explained by more and more ‘cash hoarding’ and/or usage.
Meanwhile, share of Rs 500 notes as a percent of total currency notes in circulation increased during the period from 14.7 percent to 17.4 percent. The corresponding figures for Rs 1,000 stood at 6.6 percent as of 31 March, 2014 and 7 percent as of 31 March 2016. In value terms, Rs 500 and Rs 1000 notes together account for Rs 14.2 lakh crore, which is 86.4 percent of the total as of 31 March, 2016. This is an increase from Rs 10.8 lakh crore (84.1 percent) in fiscal 2014.
According to the RBI press conference on 8th November, 2016, there are 16.5 billion ‘500-rupee’ notes and 6.7 billion ‘1000-rupee’ notes in circulation.
All these statistics substantiate the point that Rs.500 note is a norm, and has lost its ‘big’ note status as defined by the lobby that wants to control black money through currency demonetisation. Prime Minister was probably not advised on this, and has ended up putting common people into difficulties, by his bold initiative. His announcement should have been preceded by a preparation on increasing the circulation of Rs.100 notes, equivalent to the volumes and value of Rs.500 and Rs.1,000 notes. Prime Minister should have timed it better by being conscious of agricultural season. He was probably conscious of salaries and hence 8th day of the month was chosen.