There are fanciful accounts of how the Reserve Bank of India’s (RBI) move to withdraw from circulation all currency notes issued prior to 2005 will help unearth black money and force those hoarding cash to spend it, if only on gold and property. The truth is it is highly unlikely that many people, whether businessmen or politicians, store vast sums of unaccounted money in cash for extended periods — over nine years in this case. Those who generate black money are likely to rotate their cash just as grain hoarders do to their stashes. The ‘first-in, first-out’ principle that applies to traders stocking wheat holds equally for currency hoarders: most of the cash stashed in 2004 would by now have well been spent on such things as daughters’ marriages and elections or invested in land and gold. Banknotes additionally suffer erosion of value — a disincentive for storing them too long.

Also, it is instructive to estimate how much black money could be stashed away in pre-2005 currency. The RBI’s data shows the total banknotes in circulation as on end-March 2005 at ₹3,61,227 crore, of which ₹1,94,810 crore were in denominations of 500 and 1,000. A large part of these hoarding-worthy notes are likely to be in circulation amongst the lay public, possibly already soiled and unfit for use. Given this, there is not much likely to be left lying around stuffed in mattresses or hidden away in safes. If anything, the likelihood of currency hoards is much greater with respect to notes issued more recently. In fact, between March 2005 and March 2013, the value of outstanding ₹500 and ₹1,000 denomination banknotes in circulation increased by ₹7,70,990 crore — a near four-fold jump. It is obvious then that the RBI’s order on withdrawing currency notes printed before 2005 will do little to bring black money into the open. Nor is it intended to.

The real objective, instead, seems the weeding out of counterfeit currency. The notes introduced after 2005 have enhanced security features — from increase in grammage and electrolyte watermark to use of optically variable (colour-shifting) printing ink — making them more difficult to counterfeit. It is important to stress that the RBI has not declared that the pre-2005 banknotes will cease to be legal tender. But by conveying that the new notes are “more effective” and asking banks to open a window for the exchange of old notes, the public has been made more aware of the risks from counterfeits that do not display the year of printing. This may deal a severe blow to fake currency makers — inside and from across the border.

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