New Delhi: The Reserve Bank of India has finally released under a right to information (RTI) request the minutes of the board meeting that approved the Centre’s decision to demonetise Rs 500 and Rs 1,000 notes in 2016.

The minutes were released to RTI activist Venkatesh Nayak, who first asked for the documents a week after the note ban was announced on November 8, 2016.

The documents show that even though the central bank’s board approved demonetisation, they raised concerns over a few of the justifications offered by the Centre, most notably over whether it would have any significant impact on black money and counterfeit notes.

The objections that the central bank put forth in the meeting were first reported on by the Indian Express in November 2018.

While the RBI ultimately okay-ed the move – calling it “commendable” and saying that the “balance of advantage” would ultimately lie in the withdrawal of Rs 500 and Rs 1,000 notes – the board meeting minutes still pose questions over the approval process.

For instance, some members of the RBI’s board appear to have shot down three of the primary arguments put forth by the government. The minutes do not say who raised which concern or indeed whether the reasoning behind each objection were shared by all directors.

The first justification for demonetisation came from a finance ministry letter to the RBI in November 2016, which put forth an argument that was later endorsed publicly by right-wing economists like S. Gurumurthy. The argument is that while the Indian economy grew by 30% between 2011-2012 and 2015-16, the growth in bank note denominations like Rs 500 and Rs 1,000 is far higher (36% and 109% respectively).

The underlying implication here is that the growth in large bank notes was due to India’s black economy and corruption.

To this, the meeting’s minutes reply under a section titled “significant observations made by directors”:

“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 second and third justifications for the note-ban came from a “White Paper on Black Money” that was apparently prepared by the government’s revenue department and then sent to the RBI. The two arguments made here are that firstly, India’s shadow economy rose to 23.2% of GDP in 2007 according to World Bank data; and secondly, counterfeiting is on the rise, with the total quantum of counterfeit currency said to be at Rs 400 crore.

On both these counts, some of the RBI’s directors were not impressed. On whether it would curb the flow of black money, the minutes note:

“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.”

And on the question of fake currency, the central bank recorded:

“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”.

Minutes of RBI’s board meeting on demonetisation by The Wire on Scribd

If some directors on the RBI’s board had legitimate concerns over demonetisation’s raison d’être, why did it approve the measure?

There appear to be two reasons. Firstly, the central bank’s board appears to have liked the prospect of the note-ban potentially accelerating the process of financial inclusion and nudging people into shifting towards digital payments.

And two, the board was “assured” that the concerns that they raised had been “under discussion between the Central Government and the RBI over the last six months”. It doesn’t say who did this ‘assuring’, though.

This timeline put forth – “six months” of debate – is a new piece of information. This would imply that the central bank and the Modi government had been discussing and debating demonetisation from June 2016.

This at least partly lines up with what former RBI governor Raghuram Rajan has stated. In past interviews, Rajan has noted that he was asked by the government for his views on demonetisation in February 2016, which were then given orally. After this, the government set up a committee to discuss issues regarding the note-ban. The central bank was represented on this government panel by its deputy governor in charge of currency.

This brings us back to the objections raised by the board’s directors. At the time of demonetisation, it had only ten directors, out of which three are what critics would call truly independent directors.

The board included four representatives from the RBI (governor Urjit Patel and his three deputies), one director from the central bank’s local boards (Nachiket Mor), two government representatives (Shaktikanta Das and Anjuly Chib Duggal) and three independent directors (Tata’s N Chandrasekaran, Mahindra’s Bharat Doshi and former civil servant Sudhir Mankad).

The RBI’s minutes show that Chandrasekaran was absent the day that the board decided on demonetisation, leaving only two wholly independent directors (Doshi, former CFO at Mahindra and Mankad, former chief secretary of Gujarat).

If there had been six months of debate between the government and the RBI, it is possible that the objections put forth in the meeting came from those who had no chance of being privy to any earlier discussion: Mor, Doshi and Mankad.

The problem is that the minutes of the meeting don’t say. It is also equally possible that some of the RBI’s representatives on the board also either raised or approved of the objections that were put forth – even after six months of back-and-forth between the Centre and the central bank. And if this were the case, it would show that the concerns weren’t adequately addressed and that the board approval was consequently a mere formality.

The central bank’s board meeting on demonetisation is therefore also an indictment of how poorly the Centre has handled the issue of independent directors. The RBI Act technically provides for up to ten directors from various fields to be selected by the Centre. This is how industry professionals like Doshi or Chandrasekaran and former civil servants like Mankad are usually chosen.

At the time of the note-ban decision, however, there were only three out of ten of such possible directors that had been appointed. And to make matters worse, one of the three didn’t attend the board meeting on demonetisation.

While this is not to suggest that the outcome of the meeting would have changed, it would have certainly made for far richer debate and hopefully a more transparent process.