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Last Updated : Nov 09, 2018 11:30 AM IST | Source: Moneycontrol.com

RBI approved demonetisation, but rejected Modi govt's claim on black money, fake notes: Report

The board pointed out that the withdrawal of Rs 500, Rs 1000 notes would have a negative impact on medical and tourism sectors too

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The Reserve Bank of India (RBI) Board on November 8, 2016, gave its approval for demonetisation but also rejected the government's claim that the note ban may curb black money and counterfeit notes, The Indian Express reported.

The minutes of the meeting no. 561 of RBI’s Board reveals that the central bank’s Directors described the move as 'commendable' but also warned that demonetisation 'will have a short-term negative effect on the GDP for the current year'. The minutes recorded six objections, described as 'significant observations', by the RBI Board.

RBI Governor Urjit Patel signed the minutes on December 15, 2016.

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The RBI Directors argued that the government's reasoning — note ban would help in curbing black money and restricting circulation of counterfeit cash — to ban Rs 500 and Rs 1000 notes, did not really hold good.

"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… this move would not have a material impact on those assets," the RBI Board noted.

The Ministry of Finance stated that fake currency in denominations of Rs 1,000 and Rs 500 was on the rise and the total quantity of such currency was estimated to be around Rs 400 crore. To this, RBI noted that "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."

Read — Two years on, jury still out on whether demonetisation was boon or bane

The RBI board also pointed out that the government's claim of the growth of the Indian economy being linked to the high amount of high denomination currency in circulation was flawed. It stated that the rate of inflation had not been taken into consideration.

"The growth rate of 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…," the RBI Board noted.

The Board has pointed out that the withdrawal these currencies would have a negative impact on two sectors in particular -- medical and tourism. Therefore, it asked the government to exempt private medical stores.

"Arriving domestic long distance travelers who may be only carrying high denomination notes will be taken by surprise at railway stations/airports for payment to taxi drivers and porter charges and hence put to hardship. It would also have an adverse effect on tourists," the RBI Directors had said.

According to the report, the minutes included an 'assurance' that the move was under discussion between the Centre and the RBI for six months during which 'most of these issues had been discussed'.

Editor's Take | Two years on, has demonetisation achieved its objective?

With respect to the digital economy, Patel had stated that "the proposed step also presents a big opportunity to take the process of financial inclusion and incentivising use of electronic modes of payment forward as people can see the benefits of bank accounts and electronic means of payment over use of cash…"

While the RBI board approved the move, the minutes stated that "the Board was assured that the Government will take mitigating measures to contain the use of cash… the Board considered the memorandum and after detailed deliberations concluded that in larger public interest, the balance of advantage would lie in a withdrawal of legal tender status of Rs 500 and Rs 1,000 currency notes currently in circulation…"
First Published on Nov 9, 2018 11:30 am
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