In an affidavit to be scrutinised by a five-judge bench seized of a bunch of petitions challenging the 2016 demonetisation decision, the government said, “There was a massive increase in the circulation of bank notes of Rs 500 and Rs 1,000 vis-a-vis Rs 50 and Rs 100 in the preceding five years, as per RBI data.”
“This showed a steep rise in the two highest denominations, that is 76.4% for Rs 500 and 109% for Rs 1,000 from 2010-11 to 2015-16. The added feature was also that the Centre and RBI had considered introduction of a new series of notes which can tackle black money, counterfeiting and illegal financing by simultaneously withdrawing legal tender of the denomination of Rs 500 and Rs 1,000,” it said.
The government said India had a workforce of 481 million as per the 2011 census, of whom an estimated 400 million were in the unorganised sector. Also informal employment in India constituted a far higher share of non-agricultural employment than most other economies, it said. Demonetisation was one of the steps for expansion of the formal sector and shrinkage of informal sector, it said.
Policy push included digitising transactions: Government on demonetisation
In its affidavit in Supreme Court on the 2016 demonetisation decision, the Centre said, “Withdrawal of these legal tender was one of the significant steps in the enhanced formalisation of the economy with the aim of expanding opportunities for the millions living on periphery of economy.”
“The policy push included digitising transactions, technology connectivity and implementation to enable last-mile reach, increasing the tax base, enhancing tax compliance, lowering the cost of doing business, eliminating policy distortions, facilitating financial inclusion at the formal sector level and labour and agrarian reforms,” it said.
The Centre said number of fake currency notes and their values came down significantly because of demonetisation and the volume of digital payments increased from 1lakh transactions worth Rs 6,592 crore in 2016 to more than 730 crore transactions of the value of more than Rs 12 lakh crore in a single month of October 2022.
“To sum up, the withdrawal of Rs 500 and Rs 1000 currency notes was by itself an effective measure and was also a part of a larger strategy for combating the menace of black money, fake money, terror financing an tax evasion, but not confined to any of them alone. It was an economic policy decision exercised in accordance with the powers conferred under RBI Act, 1934,” it said.
Terming the decision a well-considered one, the Centre said it was taken after extensive consultations with RBI and with advance preparations. “The preparations included finalisation of new designs, development of security inks and printing plates for the new designs, change in specifications of printing machines and provisions of stocks with RBI branches in various parts of the country,” it said.
Dissuading SC from inquiring into the measures taken to mitigate the short-term hardship to citizens in 2016, the Centre listed out the steps taken in 2016 to ease the difficulties of people.