New Delhi: Months prior to the demonetisation of Rs 1,000 and Rs 500 notes, which was undertaken by the Narendra Modi government on November 8, 2016, the Reserve Bank of India had strongly opposed the idea.
On March 15, 2016, in a letter addressed to the prime minister, finance minister and the RBI governor, an anti-corruption committee of Karnataka had suggested that Rs 500 and Rs 1,000 banknotes should be banned to tackle black money.
In response, the RBI had said: “Banknotes in Rs 500 and Rs 1,000 denomination constitute 85% of the value of notes in circulation and have a critical role in meeting genuine needs for cash for members of the public. In view of this, the withdrawal of banknotes in higher denominations 500 and 1,000 is not feasible presently.”
RBI under Raghuram Rajan had rejected demonetisation
The RBI had rejected the Union government’s demonetisation move when Raghuram Rajan was the governor of the central bank. However, after Rajan had resigned from his post on September 4, 2016, the government went ahead with the demonetisation exercise.
This was just two months after he was succeeded by Urjit Patel, who was his deputy governor.
Last month, however, the Union government submitted in an affidavit before the Supreme Court – which was hearing a batch of 58 petitions that had challenged the demonetisation move – that the note-ban was executed on the specific recommendation of the RBI’s Central Board.
It further said the RBI had also proposed a draft scheme for the implementation of the recommendation.
The government claimed that “the Central Board of the RBI made a specific recommendation to the central government for the withdrawal of the legal tender character of the existing series of Rs 500 and Rs 1,000 banknotes.”
“The recommendation and the draft scheme were duly considered by the central government and, based on that, the notification was published in the Gazette of India declaring that the specified bank notes shall cease to be legal tender,” it added.
RBI Board was unaware of any planning
The Wire had reported that the minutes of the meeting of the RBI Central Board held hours before the decision was announced by the prime minister on November 8, 2016, revealed otherwise.
According to RTI activist Venkatesh Nayak, who accessed the minutes of the 561st meeting of the Board through a Right to Information (RTI) application, “the language of para 4.4 of the minutes seems to indicate that the Board was simply not aware of this planning prior to the tabling of the deputy governor’s memorandum on the subject at its meeting less than six hours before the prime minister announced the decision to the country.”
It also said: “The Board was assured that the matter has been under discussion between the central government and RBI over the last six months during which most of these issues have been considered. Apart from the stated objectives, the proposed step also presents a big opportunity to take the process of financial inclusion and incentivising use of electronic modes of payment forward as people see the benefits of bank accounts and electronic means of payment over use of cash. (sic)”
So, the minutes clearly said that the Board was only “assured” that the matter had been under discussion between the Union government and the RBI.
The government also submitted to the Supreme Court that “the withdrawal of the legal tender character of the specified bank notes was by itself an effective measure and was also a part of a larger strategy for combating the menace of fake money, terror financing, black money and tax evasion, but not confined to them alone.”
Karnataka’s anti-graft panel had written to PM, FM, RBI suggesting note-ban
It is interesting to note that almost the same concerns were raised by the anti-land grabbing action committee of Bangalore in a letter sent to the prime minister on January 12, 2016.
The committee had written to Prime Minister Narendra Modi about the “measures to be taken to tackle the problem of black money in India”. It had also marked a copy of the letter to the then finance minister Arun Jaitley and RBI governor Rajan.
In the letter, former MLA and convener of the committee A.K. Ramaswamy had written how “black money was both an economic and a social problem”. He had noted that there was a “deafening silence” about the black money that was in circulation in India.
Ramaswamy had in 2006 also chaired the joint legislature committee, constituted by the Karnataka government to investigate and report on the encroachment of government lands in Bangalore.
He had also emphasised in the letter that “there was a close connection between real estate and black money”.
Saying that there was a need to curb the circulation of black money and to prevent its generation, he had suggested the move to demonetise Rs 1,000 and Rs 500 notes. Thus, he had said, “the black money stashed in the basement” would be made worthless in one go.
RBI replied saying demonetisation “not feasible presently”
The prime minister, his office and the finance minister did not respond to the letter. However, the RBI responded to Ramaswamy in a letter dated March 15, 2016.
The letter, which was sent by general manager E. Bage, said, “Banknotes in Rs 500 and Rs 1,000 denomination constitute 85% of the value of notes in circulation and have a critical role in meeting genuine needs for cash for members of the public. In view of this, the withdrawal of banknotes in higher denominations 500 and 1,000 is not feasible presently.”
It added, “Further, as Section 24 of the RBI Act, 1934, all the decisions regarding denominations/non-issue/discontinuance of banknotes are taken on the approval of the central government.”
The details of the communication between the committee and PM/FM/RBI were brought to light by Ramaswamy, after he shared them with Nayak on learning that he had filed RTIs on demonetisation.
Most of the black money held in assets, not as cash
Nayak, while working for the Commonwealth Human Rights Initiative, had pursued the demonetisation process and its consequences extensively through RTIs. He noted that the RBI’s directors had – contrary to the government’s stand – opined that most of the black money is not held as cash but in the form of assets such as gold or real estate.
Demonetisation, they said, would not have any material impact on those assets.
In fact, the minutes of the RBI Board meeting held hours prior to the announcement of demonetisation by Modi on November 8, 2016 reveal in para 4.3 (vi) that the Board held that “most of the black money is held not in the form of cash but in the form of real-sector assets such as gold or real-estate and that this move would not have a material impact on those assets.”
Nayak said the RBI directors had also rejected the government’s stand that the move would eliminate counterfeit notes.
Para 4.3 (v) of the minutes said while any incidence of counterfeiting is a concern, “Rs 400 crore as a percentage of the total quantum of currency in circulation in the country is not very significant.”
RBI was not aware of any study on the impact of note-ban
Earlier, in response to an RTI filed by Nayak, the RBI had said that it was not aware of any study that had been undertaken to analyse the feasibility, cost-benefit analysis or impact of the decision to demonetise the Rs 1,000 and Rs 500 currency notes.
On March 15, 2019, Nayak had also filed an RTI application with the RBI in which he had asked for a “photocopy of any feasibility study undertaken or commissioned by or made available to RBI, prior to the decision of the Government of India to cease the legal tender nature of bank notes in the denomination of Rs 500 and Rs 1,000.”
To all these queries, RBI’s central public information officer had replied to him on June 17, 2019, saying that “no such information is available with RBI.”