How is replacing 1000 rs notes with 2000 rs notes going to make black money hoarding a lot harder?
The replacement of ₹1000 notes with ₹2000 notes, as part of the 2016 demonetization exercise in India, was initially thought to help in curbing black money hoarding, but it ultimately did not achieve the intended results for several reasons:
Initial Rationale
The government's rationale was that by demonetizing the ₹1000 and ₹500 notes, it would disrupt the hoarding of black money, which was believed to be held in these high-denomination notes. Introducing the ₹2000 note was seen as a way to provide a new high-denomination note that would supposedly make it harder to hoard large sums of cash due to its larger value and presumed lower circulation4.
Practical Outcomes
However, several factors undermined this strategy:
- Quick Adaptation: Black money hoarders found ways to deposit their old notes into the banking system, often using intermediaries to avoid detection. By August 2018, 99.3% of the demonetized notes had been returned to the banks, indicating that most black money was not destroyed but rather laundered back into the system2.
- Alternative Assets: It became clear that black money was not primarily held in cash but in other assets such as real estate, gold, and foreign bank accounts. The introduction of the ₹2000 note did not address these other forms of black money2.
- Counterfeiting: The new ₹2000 notes were quickly counterfeited, which further diminished the effectiveness of the demonetization effort in curbing counterfeit currency2.
Conclusion
In practice, replacing ₹1000 notes with ₹2000 notes did not make black money hoarding significantly harder. Instead, it created logistical challenges, economic disruptions, and did not achieve the desired reduction in black money. The move was criticized for its lack of effectiveness and the unintended consequences it caused, particularly for the poor and those in the informal economy24.