The brain has two organs – the nucleus accumbens and the anterior cingulate. These organs illuminate when an activity takes place around us and start searching for possible patterns in the environment. This primal instinct helped humans observe phenomena like changing weather, food distribution, predator behaviour, etc. That was millions of years before but the patter seeking cognition is still deep set. As the brain is programmed to search for patterns, it convinces the cerebral cortex of the existence of a pattern when, in fact, there may be none.
Like respiration or heartbeat, pattern-seeking is a persistent and natural phenomenon. One can’t consciously curb an instinct so deeply wired by virtue of evolution. Thus, whether an action really raises several questions or is just imagined by humans is difficult to discern. This may be all the more true when decisions are taken on the basis of information that themselves are vitiated by intertwined unknown knowns or known unknowns.
Take, for example, the 2016 decision to render Rs. 500 and 1000 currency notes then in circulation as illegal tenders. This was supposed to clean the money in circulation by eliminating unclean or black money. All of these currency notes came back to the central bank of the country and apparently, no black money could be unearthed.
The decision was supposed to promote digital and online banking and thus minimise the need for currency notes for transactions. Since then the currency in circulation, in absolute terms, has increased from Rs. 17.7 Lakh crore in 2016 to Rs. 32.5 lakh crore in 2023.
Those outside the core are still struggling to make sense of the decision. Larger denomination currency notes are more susceptible to hoarding black money. The availability of such currency notes does not serve its purpose for small transactions unless people are able to change them for smaller denomination notes.
This means that this currency could have been used only for large transactions. But much before the decision, people had been prohibited from making any cash payment in excess of Rs. 2000. So, the decision served to whom? Or what purpose?
The mystery around the decision to put Rs. 2000 denomination notes in circulation in 2016 has only deepened. At that time, it was argued that the printing of currency notes and putting them in circulation is a time-consuming process and that a note of this denomination was launched to ensure that the economy does not take a hit due to the shortage of currency in circulation.
The point must be well taken. What is, however, intriguing is the decision to change the sizes of the newly issued currency notes when everyone knew that their dispensation through automatic teller machines (ATMs) would get further delayed as it would necessitate suitable modifications in the ATMs which would in turn take a lot of time.
These, however, belong to the past and history is often a mystery and let bygone be bygone. In any case, the highest court of India has already upheld the constitutional validity of the demonetisation decision. It should put a stop to all the contentions and counter-contentions, even though it may not have helped resolve the disruption that the decision caused. The consequent pain and suffering may also not have been mitigated.
The issue has become alive again with an equally intriguing decision of withdrawing Rs. 2000 currency notes and giving people a four months window to get them exchanged for smaller denomination notes. Will this resolve the disparaging discourses on 2016 demonetisation or would it further deepen the mystery surrounding the earlier decision? In behaviour terms, the two decisions are exclusive independent events, which opens a myriad of other possibilities.
Most investment banking economists are of the view that the decision would cause a surge in conspicuous and high-value spending in gold and jewellery, high-end consumer durables, and real estate and would thus trigger growth in the economy. A few others feel that it may prove to be a temporary punch to the macroeconomic outlook and sentiments.
If the above arguments are to be believed, the Reserve Bank of India (RBI) is seeking to boost the economy by pulling off Rs. 3.62 Lakh Crores worth of Rs. 2000 denomination notes that were in circulation by the end of March 2023. Notably, as of the end of March 2018, these large denomination currency notes counted for Rs. 6.73 Lakh Crores. Obviously, these notes have been away from the banking system and were being apparently held by cash hoarders.
The major argument for the 2016 demonetisation was to clean the economy by getting rid of black money and corruption, extremism and terrorism. What had apparently guided the decision then was the belief that the large denomination currency notes lead to keeping cash away from the banking system and is thus a favourite for black money holders, extremists, and terrorists. Why is that argument not valid now? What could possibly be the reason for taking a U-turn on hoarding cash?
RBI claimed that the decision to withdraw Rs. 2000 denomination banknote from circulation was taken in pursuance of its Clean Note Policy (CNP). This policy apparently requires the currency chest branches of banks to offer, even to non-customers, good-quality notes and coins in exchange for soiled and mutilated notes. It is apparently a standing policy for weeding out old series notes by replacing them with newer notes.
Accordingly, such notes would have automatically gone out of the system in due course of time. Issued prior to March 2017, they are almost at the end of their lifespan of 4-5 years. The explicit announcement of their withdrawal and permitting a four-month window to exchange them in a way tantamount to helping the hoarders. Many feel that the timing of the decision lends credence to this argument.
Unlike demonetisation, this decision is least likely to hurt the common man for several reasons. It could be due to the digital transformation of transactions. Going by the RBI data, Rs. 71 Billion worth of transactions were done digitally through UPI alone during the financial year 2022-23. Quite a noteworthy boost compared to the previous three years.
If the common men still have a small amount of Rs. 2000 notes, they can convert them easily. They are thus insulated from the move. Thus, the decision is being interpreted to benefit cash hoarders by giving them the opportunity to convert their hoardings. But why? However, once bitten twice shy is an old adage. Past trauma makes people risk-averse and distrustful.
Obviously, the brain is seeking a pattern in the two policies and is puzzled by criss-cross communication. Unable to make sense, they perceive a high degree of uncertainty which enhances their risk perception. Amygdala, located in the brain’s medial temporal lobe, triggers a wide variety of emotional reactions including anxieties leading to a fight or flight response.
Furqan Qamar is a professor at Faculty of Management Studies, Jamia Millia Islamia. Taufeeque Ahmad Siddiqui is a faculty at Faculty of Management Studies, Jamia Millia Islamia.