Demonetisation: Modi didn't wait for RBI's decision

Demonetisation: Modi didn't wait for RBI's decision

Former RBI Governor Urjit Patel-led Central Board, which was asked to consider Centre’s demonetisation proposal, had met less than two-and-a-half hours before the announcement of note ban on November 8, 2016. And, Prime Minister Narendra Modi went ahead with the decision even before the central bank’s board approved of it.

The approval was sent to the government on December 16 — a full 38 days after Rs 500 and Rs 1,000 currency notes stopped being legal tender — and RBI had disagreed with most of the government’s pleas in favour of the ban.

The RBI has, for the first time, revealed this in the minutes of the meeting of its board held at 5.30 pm on November 8, 2016, sought through an RTI query, 28 months after the note ban, which was announced by Modi at 8 pm on the same day.

It said the draft of demonetisation was drawn up by the Ministry of Finance, which stated that growth of bank notes of Rs 500 and Rs 1,000 denomination was 76.38% and 108.98% during the period 2011-16, whereas the economy had grown only by 30%.

But the RBI directors disagreed saying, “The growth rate of the economy mentioned is real rate, while the growth in currency in circulation is nominal and when adjusted for inflation, did not constitute any stark difference”.

The RBI also disagreed 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 the GDP in 1999 and had risen to 23.2% in 2007, which was based on World Bank estimates.

RTI activist Venkatesh Nayak had sought records of all meetings of the RBI Central Board of Directors along with the papers, presentations or other documents placed before it. Initially, RBI had refused to give information and cited exemption clause to deny records.

Notably, the demonetisation minutes did not mention the black money reports submitted by the NIPFP and two other research institutions, which were given the job of black money calculation.

RBI directors were of the view that most of the black money was held in the form of real-sector assets such as gold or real estate and not in cash and that demonetisation would not have any material impact on those assets. It had said that demonetisation would have a negative impact on the economy in the short term.

The minutes vaguely mentioned that the Board found the measure commendable, but did not elaborate. It also mentioned that demonetisation will help achieve financial inclusion.

Finance Minister Arun Jaitley had recently told Parliament that black money study reports could be made available to members of Parliament who sit on the department-related Parliamentary Committee on Finance, but would not be placed in the public domain.

However, section 8(1) of the RTI Act states that information which cannot be denied to Parliament or state legislature cannot be denied to a citizen.