Political Economy

RBI Never Thought Demonetisation Would Tackle Black Money or Counterfeiting

“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…this move would not have a material impact on those assets,” the RBI board had said.

New Delhi: While the Reserve Bank of India (RBI) may have acquiesced to demonetisation, it had had not found merit in the Narendra Modi government’s argument that the note ban would help unearth black money and check counterfeit currency, Indian Express reported.

These were the two main justifications given by Prime Minister Narendra Modi while saying that the old Rs 1,000 and Rs 500 notes would no longer count as legal tender on the evening of November 8, 2016.

This revelation is likely to give more ammunition to demonetisation critics to corner the government over the decision, say political analysts.

Also read: What Arun Jaitley’s Defence of Demonetisation Conveniently Ignores

While defending the Modi government’s demonetisation on its second anniversary on Thursday, finance minister Arun Jaitley claimed success in digging out illegitimate money parked inside and outside the country.

“The government first targeted the black money outside India. Asset holders were asked to bring this money back on payment of penal tax. Those who failed to do so are being prosecuted under the Black Money Act. Details of all accounts and assets abroad which have reached the government, resulted in action against the violators,” Jaitley wrote on Facebook.

“Demonetisation compelled holders of cash to deposit the same in the banks. The enormity of cash deposited and identified with the owner resulted in suspected 17.42 lakh account holders from whom the response has been received online through non-invasive method. The violators faced punitive actions.”

According to the Indian Express, the RBI’s central board gave its approval to the government’s note ban proposal just hours before the prime minister was to make his announcement. But it rejected, in writing, the government’s reasoning on black money and counterfeit notes.

Also read: Two Years On, Modi Government Continues to Block Information on Demonetisation Deaths

As per the minutes of the 561st meeting of the RBI’s Central Board, reportedly accessed by the newspaper, the board termed the move “commendable” but also warned that demonetisation “will have a short-term negative effect on the GDP for the current year”.

The minutes were signed by RBI governor Urjit Patel on December 15, 2016, five weeks after the board meeting.

In all, six objections, described as “significant observations”, were recorded in the minutes by the RBI board.

The government’s claim that the withdrawal of high-value notes would help curb black money and restrict the circulation of counterfeit cash did not hold good, RBI directors argued while discussing the proposal, records of the meeting show.

“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…this move would not have a material impact on those assets,” board members contended, punching holes in the government’s theory.

On fake currency, the finance ministry informed the RBI board that counterfeiting is on the rise in the denominations of Rs 1,000 and Rs 500, and the total quantity of such currency is estimated to be around Rs 400 crore.

Also read: Two Years after Demonetisation, the Nightmare Continues for India’s Informal Economy

But the RBI board did not find this to be a justifiable reason for the note ban and expressed reservations, saying, “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.”

The board also put in writing its apprehension that the withdrawal of high-value notes would have a negative impact on medical and tourism sectors. It argued that private medical stores too should be included in the exemption list.

In a series of tweets, Congress leader and former finance minister P. Chidambaram said, “RBI minutes of 7-11-2016 is a comprehensive repudiation of government’s “justification” for demonetisation… RBI Board, with many members absent, met at 5.30 pm on 8-11-2016 and disagreed with the key reasons given by government, yet obediently endorsed demonetisation. That was a black day in RBI’s history… Shockingly, government’s paper calculated GDP growth in real terms and growth in money circulation in nominal terms, yet compared the two and reached absurd conclusions. So much for the competence of the government.”