The last couple of months have seen much debate on the legality of the Government of India’s decision to demonetise Rs 500 and Rs 1,000 currency notes. The Supreme Court has framed nine questions of law pertaining to the legality of the demonetisation exercise.

Two issues that have not been subject to much media scrutiny are: When did the Central Board of the Reserve Bank of India make the decision to issue new Rs 2,000 bank note, and redesigned Rs 500 note, and how did the government procure the funds required to print the new notes?

Did RBI follow the law?

First, let’s address the decision to introduce a new Rs 2,000 bank note, and Rs 500 notes in a new design.

As per the provisions of the Reserve Bank of India Act, 1934 the Central government may introduce bank notes of any denomination below Rs 10,000 only “on the recommendation of the Central Board” of the RBI. The relevant provision of the Act is reproduced below:

“S. 24 Denomination of notes:

(1) Subject to the provisions of sub-section (2), bank notes shall be of the denominational values of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify in this behalf.”

Similarly the Central government has to consult the Central Board of the RBI on the question of the “design, form and material of bank notes”. The relevant provision of the Act is reproduced below:

“25. Form of bank notes.

The design, form and material of bank notes shall be such as may be approved by the 3 [Central Government] after consideration of the recommendations made by Central Board.”

So clearly there are two decisions that required prior approval of the Central Board. The question is, when were these decisions taken?

As per a Right To Information reply provided by the RBI, the Central Board made the decision to make a recommendation to the Union government to demonetise the Rs 500 and Rs 1,000 bank notes at a meeting on November 8, 2016, just hours before Prime Minister Narendra Modi broadcast the announcement on national television.

As per Section 26 of the RBI Act, the Central Board has to meet and make a recommendation to the Government of India to demonetise the legal tender in question, and this decision was allegedly made at the November 8 meeting.

However, the decisions to introduce the new notes of Rs 2,000 denomination, along with the decision on the design of the new notes had to be taken by the Central Board several months prior to the November 8 meeting because these notes were officially introduced in circulation on November 10.

In 2016, as per the press releases published on the RBI’s website, its Central Board met four times prior to November 8. The dates are as follows: March 12, May 19, July 7 and August 11. All of those meetings took place when Raghuram Rajan was the governor of the central bank. His term ended on September 4, and Urjit Patel took over as governor. There was no Central Board meeting between September 4 and November 8. Yet, by October, there were reports in the press that said that bank notes of a new denomination of Rs 2,000 were being introduced. As per some news reports, the government mints began printing the new notes in August itself, when Rajan was still governor.

The RBI needs to clarify when exactly its Central Board met to take the decision to introduce the new Rs 2,000 note, and approve the new design of the Rs 500 note? Was it taken at the meetings that Rajan attended before he stepped down as governor?

These are serious questions that are required to be answered not least because the Madras High Court is already hearing a Public Interest Litigation against the government’s decision to use Devanagari numerals on the new Rs 2,000 bank notes.

The citizens of this country deserve to be provided complete information regarding the demonetisation process, and the RBI should make this information available proactively.

Expenditure sanction

Second, let’s talk of the expenditure the government incurred to finance the printing of the new Rs 500 and Rs 2,000 notes.

As per estimates put out in the press, it will cost the Union government a sum of Rs 12,000 crores to print the new Rs 2,000 and Rs 500 bank notes. That is a substantial sum of money. As per the Constitution of India, all appropriations from the Consolidated Fund of India, the most important of government accounts, have to be approved by Parliament. For this purpose, the government usually introduces appropriation bills in Parliament, and once the bills are passed, the funds can be defrayed from the Consolidated Fund of India.

In many ways, Parliament’s power to control government expenditure goes to the heart of democracy. Parliamentary control over public finances is the thin line between a democracy and a kleptocracy.

In the Winter Session, Parliament passed two appropriation bills that can be accessed here and here. These bills are exceptionally vague and provide almost no detailed information regarding the different heads of expenditure. In contrast, appropriation bills passed by the US Congress are incredibly detailed.

The question now, is under what head did the government procure this Rs 12,000 crores, and did the Opposition parties, especially those vociferously opposed to demonetisation like the Trinamool Congress and Congress approve this amount while voting for one of the appropriation bills, without even offering a token vote against the expenditure?

Some of these questions will most likely be answered during the hearings held by the Parliamentary Public Accounts Committee and the department-related Parliamentary Standing Committee on Finance, but the fact that the Opposition hasn’t already asked these questions in Parliament says something about the quality of its strategy.