Former Chief Economic Advisor Krishnamurthy Subramanian has supported the Reserve Bank of India’s (RBI) decision to withdraw the Rs 2,000 banknote from circulation and listed out reasons for it.

Subramanian, who was the CEA from 2018 to 2021, argued that the use of the Rs 2,000 note as a medium of exchange “has declined significantly” and is being used “primarily to hoard money”.  This is “seen in several raids where mountains of currency stored using the Rs 2,000 note were uncovered”.

In a long tweet posted on 20 May, he explained that the 80-20 rule suggests that even if 80% of the people are legitimately storing this money in Rs 2,000 notes, they are likely to be storing only 20% of the overall value. 

“20% of those who are storing the money in Rs 2,000 notes are likely to be hoarders who may account for 80% of the value,” he wrote on Twitter.

Subramanian said the move would not inconvenience common people for five reasons.

As per the first reason, the Rs 2,000 notes are not being used much as a medium of exchange. In fact, they currently constitute only 10.8% (Rs 3.6 lakh crore) of Currency in Circulation (CiC).

Secondly, he said digital payments are being used in huge numbers for economic transactions. "So, the role of physical currency notes, especially Rs 2,000 note, as a medium of exchange has declined significantly," he added

Thirdly, the Rs 500 note, together with digital modes of payments, can be used as a medium of exchange to seamlessly substitute even the minimal use of Rs 2,000 note for this purpose.

Fourthly, since digital transactions are expected to multiply by three times from now to 2026 (BCG report), there would not be much need for the Rs 2,000 banknote in the future.

Lastly, he said, "Most importantly, as RBI has said that the Rs 2,000 note will continue to be legal tender (even beyond 30-Sep-2023 is my current understanding though RBI may need to clarify this), genuine folks holding the Rs 2,000 note can exchange even beyond 30-Sep-2023."