Andhra Pradesh Chief Minister N. Chandrababu Naidu has renewed his call to scrap Rs 500 currency notes, arguing that phasing out high-denomination currency is crucial for tackling corruption. His demand, made on Monday, comes a day after the tenth anniversary of India's 2016 demonetisation.
Naidu, who leads the Telugu Desam Party (TDP), stated that he had previously presented this proposal to Prime Minister Narendra Modi and would continue to advocate for it. He believes that reducing large cash transactions, coupled with greater adoption of digital currency and technology-driven governance, could significantly curb illicit financial activities.
Expert Warns Against Outright Ban
However, the proposal has drawn caution from financial experts. Prasanna Tantri, an Associate Professor of Finance at the Indian School of Business (ISB), has strongly advised against an immediate and outright ban on Rs 500 notes. Tantri highlighted that such a move would be excessively disruptive at this stage, urging the Reserve Bank of India (RBI) and the government to first undertake a comprehensive study of India's cash dependence.
Professor Tantri pointed out that despite a decade of rapid growth in digital payments, currency in circulation remains remarkably high. By mid-October, India's currency in circulation stood at Rs 43.47 lakh crore, representing nearly 12% of the projected GDP. This figure, he noted, is comparable to the share observed before the 2016 demonetisation, when digital payment infrastructure was far less developed. Furthermore, currency growth at 13.5% year-on-year has outpaced nominal GDP growth recorded in the April-June quarter.
Understanding Cash Dynamics
Tantri emphasized the need for policymakers to understand the underlying reasons for continued high cash usage. He posed several critical questions:
- Where and when do cash withdrawals spike across the country?
- Do cooperative banks exhibit different withdrawal patterns?
- What role does the quality of bank oversight play?
- Do falling deposit rates influence cash withdrawals?
- Are some merchants avoiding digital payments due to misconceptions about tax implications?
- What types of transactions does this cash finance, and how much of it remains idle?
The ISB professor asserted that while external researchers lack the detailed data to answer these questions comprehensively, the RBI and the government possess the necessary information. He recommended that they utilize withdrawal records, field intelligence, and surveys of households and merchants to gain insights. Tantri expressed hope that such an exercise would be completed and findings shared before any decision is made regarding the future of the Rs 500 note.
It's worth noting that the Narendra Modi government previously demonetised the then-existing Rs 500 and Rs 1,000 notes on November 8, 2016, to combat black money, counterfeit currency, and corruption. New Rs 500 notes were subsequently introduced, and the Rs 2,000 notes, which were also introduced post-2016, were withdrawn from circulation in 2023.