The government and the Reserve Bank of India (RBI) discussed about the withdrawal of Rs 500 and Rs 1,000 notes for six months prior to the announcement of note ban by the Prime Minister Narendra Modi on November 8, 2016, according to the minutes of the RBI Central Board meeting which approved the proposal.
Directors on the RBI’s Central Board had warned against “short-term negative effect” of demonetisation on the GDP and stated that as the black money was mostly held as gold or real estate, it would not have a material impact on those assets.
“The Board was assured that the matter has been under discussion between the Central Government and the RBI over the last six months during which most of the issues have been considered,” the RBI said in an RTI reply to Venkatesh Nayak and hosted on the website of the Commonwealth Human Rights Initiative. “The Board was assured that the government will take mitigating measures to contain the use of cash.”
The discussion started when Raghuram Rajan was the RBI Governor. While Rajan’s tenure ended on September 3, 2016, the announcement of the withdrawal of notes was made after Urjit Patel took charge on September 4, 2016. Urjit Patel, Deputy Governors R Gandhi and SS Mundra and directors Anjuly Chib Duggal, Shaktikanta Das, Nachiket Mor, Bharat Doshi and Sudhir Mankad attended the meeting which approved demonetisation. Das, who is the current RBI Governor, was the Economic Affairs Secretary during demonetisation.
According to the minutes of the 561st meeting of the Central Board, the growth rate of economy mentioned is the real rate while the growth in currency in circulation is nominal. Adjusted for inflation, difference may not be stark. “Hence this argument does not adequately support the recommendation,” it 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,” it said. “Most of the black money is held not in the form of cash but in the form real sector assets such as gold or real estate and that his move would not have a material impact on those assets.”
“It’s a commendable measure but will have short-term negative effect on the GDP for the current year,” the RBI minutes said. Significantly, Nachiket Mor’s second term on the central board of the RBI was cut short by the government in 2018. Mor was re-nominated by the government in August 2017 for a second term of four years. According to the minutes, the Board was informed that there has been a steep rise in the circulation of bank notes in the denomination of Rs 500 and Rs 1,000 in the last five years. As per the government letter placed before the Board, the economy has grown by 30 per cent during 2011-12 to 2015-16 whereas the bank notes in the denonmination of Rs 500 and Rs 1,000 have grown by 76.38 per cent and 108.96 per cent respectively over the same period.
The white paper of black money prepared by the Department of Revenue mentions that cash has always been a facilitator of black money since transactions made in cash do not leave any audit trail, it said. On August 29, 2018, over 21 months after Rs 500 and Rs 1,000 notes were withdrawn from circulation on November 8, 2016, the RBI said that nearly all of that money had come back to the banking system.
The RBI received Rs 15.310 lakh crore of Rs 500 and Rs 1,000 notes, or 99.3 per cent of Rs 15.417 lakh crore worth of notes which were in circulation as on November 8, 2016 when demonetisation was announced, RBI said in annual report for 2017-18. This effectively means just Rs 10,720 crore of the notes failed to come back to the RBI.