Demonetisation: RBI Board Disagreed, but Put Its Stamp on the Decision 38 Days Later, Reveals RTI
Moneylife Digital Team 11 March 2019
It has been more than two years since prime minister Narendra Modi announced to withdraw currency notes of Rs1,000 and Rs500 from circulation. However, the aftershocks of demonetisation and information about what happened in the days leading up to it is still being revealed. The latest revelation is over the disagreement of some members of the central board of the Reserve Bank of India (RBI) about demonetisation move on 8 November 2016 and how almost 38 days later it was made to put its stamp on the decision. 
 
According to documents procured under the Right to Information (RTI) Act by Venkatesh Nayak of Commonwealth Human Rights Initiative (CHRI), the 561st meeting of RBI's Board was held less than five hours before the prime minister announced the DeMon (demonetisation) decision to the country on television. 
 
"RBI sent its resolution approving the DeMon exercise to the government only on 16 December 2016, a full 38 days after Rs500 and Rs1,000 currency notes stopped being legal tender. So essentially, RBI's Board had only rubber stamped the government's initiative," Mr Nayak says in his blog post.
 
 
As per the minutes of the RBI board meeting received by Mr Nayak under the RTI, the government's letter containing draft DeMon scheme drawn up in the ministry of finance stated that growth of the bank notes of Rs500 and Rs1,000 denomination was 76.38% and 108.98%, respectively, during 2011-2016 whereas the economy had grown only by 30%. 
 
RBI's directors, however, disagreed with this reasoning and responded that the growth rate of the economy was the real rate while growth in currency circulation was nominal and when adjusted for inflation did not constitute any stark difference, the reply shows.
 
In addition, the central bank also disagree with the revenue department's finding that the shadow economy for India, where black money transactions do not leave an audit trail, was estimated at 20.7% of gross domestic product (GDP) in 1999 and had risen to 23.2% in 2007 based on estimates from the World Bank. "It is interesting that the DeMon minutes do not mention the black money reports submitted by National Institute of Public Finance and Policy (NIPFP) and two other research institutions. My formal request for copies of these reports was rejected under the RTI Act," Mr Nayak stated.
 
NIPFP works under the ministry of finance. 
 
Talking about black money, the directors of RBI opined, "most of the black money is not held as cash but in the form of real-sector assets such as gold or real estate and that DeMon would not have any material impact on those assets."
 
RBI directors rejected the government's concern that an estimated Rs400 crore of counterfeit currency in circulation was significant as a percentage of the total quantum of currency in circulation. The directors also noted that DeMon will impact negatively on the GDP in the short term, reply received under RBI shows.
 
Mr Nayak says, "What were the compelling factors that justified DeMon, which took the lives of more than a 100 citizens who stood outside banks to exchange their currency notes and scores of bankers who collapsed counting them and have had well documented negative impact on various sectors of the economy which is still unravelling? RBI's DeMon minutes are strangely silent on this matter."
 
The RBI board also stated that DeMon will help incentivise use of electronic modes for making payments instead of cash. Opinion on whether increased use of electronic modes of payment was due to DeMon is divided. RBI's own recent reports present a contradictory picture. While e-transactions have grown manifold there is more cash circulating in the economy than there was on the date of demonetisation. So on what basis did RBI make its assumption on 8 November 2016, is not revealed in the DeMon minutes, Mr Nayak added.
 
"Interestingly," he says, "the DeMon minutes reveal that a deputy governor of RBI was working with the Central government on the initiative to withdraw legal tender of the Rs500 and Rs1,000 currency notes for six months. But his name is not mentioned anywhere in the minutes. The language of para #4.4 of the minutes seems to indicate that the (RBI) 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."
 
 
According to Mr Nayak, this information supplied by the central public information officer (CPIO) of RBI, however, is not complete. He says, "Last month, RBI revealed its intention to disclose these minutes at a hearing in my RTI case pending before the Central Information Commission (CIC). The CIC issued a penalty show cause notice to the CPIO for the inordinate delay in making a decision in favour of disclosure."
 
"Three days ago, CIC staff informed me telephonically about the cancellation of the next hearing in this case which was scheduled for 08 March, 2019. However, RBI's CPIO emailed me these minutes the same day. He also shared RBI's written submissions to the CIC against the grounds cited in my second appeal case. As the CIC might not have examined it yet, I am not sharing those submissions publicly," Mr Nayak concluded.  
  
 
 
Comments
Govinda Warrier
4 years ago
The excerpts from the minutes shows that the board "considered" certain things and "Resolved" to recommend...When? When was the resolution passed by the board? St the beginning of the document there should be the date of the board meeting. Why this date is not revealed? Or, are these minutes about some other meeting and not of November 8, 2016?
Meenal Mamdani
4 years ago
I had wondered about the sagacity of Urjit Patel since he appeared to agree with demonetization. Now it appears that he was not in favor but gave RBI approval after the fact, kind of face saving measure for the govt.
Wonder who the deputy governor is who was in cahoots with the PMO while demonetization was being planned. Obviously it is not Viral Acharya as he has backed Patel all the way through. Who were the other deputy governors in RBI at that time?
PM
4 years ago
DeMon failed because there is a fundamental misunderstanding on how corruption takes place in India. The majority transfer of Black Money does not happen through transfer of Physical Currency but through Fake Accounting.

Example 1: An Officer helps a developer get a piece of government land at below market price. In return, the developer helps the officer acquire a rural/sub-urban property at below market price as well.

Example 2: A politician gives a contract to company A at above fair price. In return, company A gives a contract to Company B - promoted by the politician's family - at above fair price as well.

In both the above cases, there was no transfer of physical currency between the corrupt parties. They enriched themselves by mispricing the items on their balance sheets.
And then when you add in layers of cooked books with shell companies and offshore accounts, it becomes very difficult to figure out who exactly paid what to whom.

How would DeMon change any of the above? Nada.
This misperception probably stems from reading too many news articles where the corrupt officer always seems to be caught with excess currency. Or perhaps its the influence of movies where the villains store black money in warehouses. In reality, those scenarios are small fish. We cannot fault the common man for not understanding this. The Ministry of Finance on the other hand should be ashamed.
Dipan Shah
Replied to PM comment 4 years ago
I suggest reading the book "The New Confessions of an Economic Hit Man" by John Perkins.
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