In affidavits submitted to the Supreme Court hearing a clutch of petitions on demonetisation in which the verdict is scheduled January 2, the government said it was a “well-considered” decision and the consultation process with the Reserve Bank of India had begun in February 2016, a good nine months before Prime Minister Narendra Modi’s announcement on November 8, 2016.
The RBI, too, in its affidavit said that due process was followed and it was the one that recommended the demonetisation.
What the Government and the RBI affidavits don’t mention is the fact that the RBI’s recommendation for the noteban – a procedural requirement – came after the central bank critiqued many of the government’s justifications. These were put on record just hours before the announcement of the decision as minutes of the RBI’s Central Board meeting.
The key omissions from the affidavits:
i. Currency in circulation (CIC) as percentage of GDP: This was a key metric cited to justify demonetisation. “The magnitude of cash in circulation is directly linked to the level of corruption,” said PM Modi in his speech on November 8, 2016. “The ratio of CIC to GDP has been 11% or more in the last five financial years beginning from 2011-12 to 2015-16,” the affidavit said. Quoting other reports, it noted that at 11.55%, India’s Cash to GDP percentage ratio was much higher than that for the US (7.74%).
What the affidavit didn’t mention: CIC as a percentage of GDP jumped back to pre-demonetisation levels within three years. The RBI’s Annual Report for 2019-20 states: “…the currency-GDP ratio increased to its pre-demonetisation level of 12.0 per cent in 2019-20 from 11.3 per cent a year ago…” This ratio rose further to 14.4 per cent in 2020-21 before declining to 13.7 per cent in 2021-22, according to RBI.
ii. Steep rise in the circulation of Rs 500 and Rs 1,000 notes: “Increase in circulation of bank notes of denominations Rs 500 and Rs 1,000 vis-a-vis that of Rs 50 and Rs 100 for preceding 5 years (as per RBI data) had shown a steep rise for the two highest denominations i.e., 76.38% for Rs 500 and 108.98% for Rs 1,000,” the affidavit states, adding this steep rise compared with the rise in the size of the overall economy makes it inexplicable. “Further, as per the data available in the Economic Survey for 2014-15 and 2015-16, the size of the economy has grown less than 30% from 2011-12 to 2015-16,” it states.
What the affidavit didn’t mention: The RBI’s Central Board flagged a flaw in this analysis of the government. “The growth rate of the economy mentioned is the real rate while the growth in currency in circulation is nominal. Adjusted for inflation, the difference may not be so stark. Hence this argument does not adequately support the recommendation (for demonetisation),” state the minutes of the RBI’s central Board meeting held on November 8, 2016 at 5.30 p.m., just two and a half hours before the PM announced the demonetisation.
iii. Quantum of fake currency: Fake currency notes in the system were the first of the “three specific mischiefs, which had a serious adverse impact on the Indian economy over the past year” according to the government affidavit.
What the affidavit doesn’t mention: The RBI Central Board’s response. “While any incidence of counterfeiting is a concern, Rs 400 crore as a percentage of the total quantum of currency in circulation (over Rs 17 lakh crore) is not very significant,” stated the minutes of the RBI Central Board meeting.
iv. Use of Rs 500 and Rs 1,000 notes for storing black money: The second “mischief” demonetisation was to address was the “storage of unaccounted wealth in the form of high denomination notes which happened to be fake in many instances”, according to the government affidavit.
What the affidavit doesn’t mention: The RBI Central Board dismissed this claim. “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 (demonetisation) would not have a material impact on those assets,” stated the RBI minutes.
v. Use of fake currency for terrorism: The third “mischief” demonetisation sought to target, according to the affidavit, was the use of fake currency for terrorism and other subversive activities.
What the affidavit doesn’t mention: The issue of fake currency or high-denomination notes being siphoned towards terror finds no mention in the minutes of the RBI Central Board meeting.
vi. Timed to benefit from a scheduled change in currency notes: In its affidavit, the government said RBI was, in any case, in the process of introducing a new series of currency notes and that the decision to demonetise simply attempted to benefit from that timing. Further, the RBI, in consultation with the government, was working on the new series since January 2014.
“The Government of India and the Reserve Bank considered that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetisation of Rs 500 and Rs 1000…,” states the affidavit
The affidavit also states that “It was also presented (to the RBI’s Central Board) that such a proposal (demonetisation) could not have come at a more opportune time than coinciding with the introduction of the MG (new) series of notes.”
What the affidavit doesn’t mention: There was no mention of such an “opportune” timing in the RBI Board’s minutes. Also, if the decision to demonetise was taking advantage of the RBI’s preparations to swap old series of notes with the new ones, why did remonetisation run into so many problems. The RBI constituted a Task Force for recalibration of ATMs on November 14, 2016, almost a week after demonetisation.
Emails to the Union Ministry of Finance and the Reserve Bank of India did not elicit any response.
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The RBI, too, in its affidavit said that due process was followed and it was the one that recommended the demonetisation. 
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