THE CENTRE Wednesday told the Supreme Court it began consultations with the Reserve Bank of India in February 2016 — at least eight months before notifying demonetisation i.e., withdrawal of legal tender character of Rs 500 and Rs 1,000 notes, on November 8, 2016.
“It was taken after extensive consultation with the RBI and advance preparation… The then Finance Minister had stated in the Parliament… that Government consultation with RBI began in February 2016; however, the process of the consultation and the decision-making were kept confidential,” it said in an affidavit.
“The withdrawal… of a significant portion of total currency value was a well-considered decision,” the Centre said in the affidavit, which it said should be read as part and parcel of its earlier two affidavits filed on December 1, 2016, and in October 2018.
Defending its action, the Centre said the decision was based on RBI’s recommendation for the withdrawal of the Rs 500 and Rs 1,000 notes and its proposed draft scheme for implementation. “The Central Board of the RBI made a specific recommendation to the Central Government for the withdrawal of legal tender character of the existing series of Rs 500 and Rs 1,000 banknotes. The RBI also proposed a draft scheme for the implementation of the recommendation. The recommendation and the draft scheme were duly considered by the Central Government,” the Centre said in the affidavit. The final notification published in the Gazette of India was based on this, it added.
In this case, changes were made to the design and specifications of the new bank notes introduced for the supply of currency into the economy. The preparations, therefore, included the finalisation of the new designs, development of security inks and printing plates for the new designs, change in specifications of printing machines and provision of stock with RBI branches in various parts of the country, it said.
Noting that the demonetisation action should not be seen as a standalone measure, the Centre said it was “one of the critical steps in the series of transformational economic policy steps” and “a major step to fight the menace of fake currency notes, storage of uncounted wealth and financing of subversive activities”.
Citing RBI data, the affidavit pointed out that there was a massive increase in the circulation of bank notes of Rs 500 and Rs 1,000 vis-à-vis Rs 50 and Rs 100 in the preceding five years. “This showed a steep rise to the two highest denominations, i.e., 76.4% for Rs 500 and 109% for Rs 1,000 from 2010-11 to 2015-1,” it said. Simultaneously, the government and RBI had considered the introduction of a new series of notes which can tackle black money, counterfeiting and illegal financing by withdrawing legal tender of Rs 500 and Rs 1,000 notes.
Outlining some of the “perceptible benefits” of the decision, the affidavit, filed in response to petitions challenging the 2016 demonetisation said, “The number of fake currency notes and their value came down significantly, both in terms of the detection in the banks and seizures by the security agencies… volume of digital payment transactions increased many-fold… information about deposits made into the bank accounts…enabled the income tax authorities to detect a significant amount of unaccounted income.”
The overall impact of the withdrawal of the legal tender character of the Specified Banking Notes (SBNs) on economic growth was transient with the real growth rate being 8.2 per cent in FY 2016-17 and 6.8 percent in FY 2017-18, both being more than the decadal growth of 6.6 percent in the pre-pandemic years, it said.
The affidavit pointed out that “secrecy and confidentiality were critical requirements of this consultation and decision-making process. Consequently, printing of bank notes of the new series was executed under this constraint. Therefore, reasonable restrictions on the exchange of the SBNs and cash withdrawal from the bank accounts were put in place, considering the availability of stock of the new currency notes of various denominations, past utilisation patterns and considering the needs of the ordinary citizen, to minimise hardships and also to keep in view the equitable distribution of available cash.