If demonetizing 85% of the currency hasn’t helped reduce black money or raise taxes, it’s hard to expect removing 10% of the currency will. There are brave supporters who are hoping that those storing unaccounted money in Rs 2000 notes might be harmed, but so far no one in RBI or the government is saying so.
Economists and columnists have been working hard to find logic in RBI’s Rs 2,000 withdrawal notice, just as they tried six years ago to find economic justification for the demonetization of Rs 500 notes. and 1000 rupees.
What follows is an effort to argue that the goal of “demonetization” was probably political, not economic. And therefore, the withdrawal of 2000 rupee notes may also have a hidden political motive and perhaps very little economic justification.
Let us first look at the economic rationale that was given for demonetization in 2016. The Prime Minister announced that it was a mission to eliminate black money and stop counterfeit money that was being used to finance terrorism. Moreover, some politicians have privately said that they expect 3 to 5 lakh crore of notes not to be returned as black money hoarders will not want to be caught with inexplicable income. This, in turn, would reduce the debts of the RBI and hence increase the transfer of Rs 3-5 lakh crore surplus to the government which could be distributed through social welfare schemes.