On Wednesday, the Centre informed the Supreme Court that consultations with the Reserve Bank of India commenced in February 2016 – at least eight months before notifying demonetisation, that is, the withdrawal of the legal tender status of Rs 500 and Rs 1,000 notes on 8 November 2016.
“It was a decision made after extensive consultation and preparation with the Reserve Bank… The then Finance Minister stated in Parliament that Government consultations with RBI began in February 2016, but the process of consultation and decision-making was kept confidential,” the affidavit stated.
In its affidavit, the Centre stated that withdrawing a significant portion of total currency value was a well-considered decision. The Centre said the affidavit should be viewed as part and parcel of two previous affidavits filed on 1 December 2016 and October 2018.
The Centre defended its decision, stating that it was based on the RBI’s recommendation to withdraw the Rs 500 and Rs 1,000 notes and its proposed implementation scheme. RBI’s Central Board recommended to the Central Government that the existing Rs 500 and Rs 1,000 banknotes be withdrawn from legal tender status. As part of implementing the recommendation, the RBI has also proposed a draft scheme. The Central Government considered the request and the draft scheme,” the Centre stated in the affidavit. The final notification published in the Gazette of India was based on this information.
As a result of this change, new banknotes were introduced to supply currency to the economy that was different in their design and specifications. It stated that preparations included finalising the latest plans, developing security inks and printing plates, changing the specifications of the printing machines, and providing stock to RBI branches throughout the country.
As the Centre noted, demonetisation should not be viewed as a standalone measure but is a critical step in a series of transformative economic policy initiatives, and it is a significant step toward combating the menace of counterfeit currency notes, the storage of unaccounted wealth, and the financing of subversive activities.
According to the affidavit, RBI data indicate that the circulation of banknotes of Rs 500 and Rs 1,000 has increased significantly over the period preceding the testimony. There has been a sharp increase in demand for the two highest denominations, i.e., 76.4% for Rs 500 and 109% for Rs 1,000 between 2010-11 and 2015-1,” it stated. At the same time, the government and RBI had discussed the possibility of introducing a new series of notes to combat 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.”
Economic growth was transient due to the withdrawal of legal tender status from Specified Banking Notes (SBNs). The real growth rate was 8.2 per cent in FY 2016-17 and 6.8 per cent in FY 2017-18, higher than the decadal growth rate of 6.6 per cent in the pre-pandemic years.
According to the affidavit, this consultation and decision-making process required secrecy and confidentiality. Due to this constraint, the printing of the new series of banknotes was undertaken. To reduce hardships and to ensure an equitable distribution of available cash, reasonable restrictions have been imposed on the exchange of SBNs and cash withdrawals from bank accounts based on the availability of new currency notes of various denominations, past usage patterns and the needs of the ordinary citizen.