 "Photo: Kamlesh Pednekar")
In order to reap fiscal bonanza from the demonetisation process, the National Democratic Alliance (NDA) government would need to pass a new law or amend the existing Reserve Bank of India (RBI) Act.
The fiscal bonanza for the government would arise out of the Rs 500 and Rs 1,000 denomination notes that people do not deposit in the bank by the end date.
The government expects that some people holding black money, unable to account for it against their declared incomes, would destroy the currency notes rather than deposit them in banks and face the threat of income-tax queries. Reports of Rs 500 and Rs 1,000 notes being burnt have emerged from different parts of the country.
But it is only through a legislative process that the government can gain from the Rs 500 and Rs 1,000 that are not deposited with banks or the RBI at the end of deadline the government has set.
Observers have argued back and forth about how the government and the RBI treat the value of the destroyed currency on their books. Questions have been raised about the legality of the government appropriating an equal value onto its books and using it as it so pleases.
But the previous demonetisation exercise that was carried out by the Morarji Desai government in 1978 shows the legal steps the NDA government would need to take.
This is how it would happen.
The circulation of a note goes through two legal steps. When the RBI prints and issues a note it is called a ‘bank note’. Every bank note circulated by the RBI into the economy is called ‘legal tender’ and is guaranteed by the government. These two steps together give legal mandate to what people generally called a note.
On November 8, the NDA government passed a notification to withdraw the ‘legal tender’ status of all Rs 500 and Rs 1,000 notes. This was done under Section 26 (2) of the RBI Act. But even after the withdrawal of the legal tender status, the Rs 500 and Rs 1,000 notes continue to be legally classified as ‘bank notes’.
Under the law, if a person is to take a Rs 500 or Rs 1,000 note to RBI, the central bank is obliged to exchange it for other bank notes, even if it has been declassified as ‘legal tender’.
This is provided under section 39 of the RBI Act. So, technically the RBI would continue to be liable to give back currency equivalent, if someone was to take the Rs 500 and Rs 1,000 note to it.
In other words, even if say black money hoarders were to destroy Rs 1 lakh crore worth of Rs 500 and Rs 1,000 denomination notes, the RBI’s issue department would continue to show the amount as a liability on its account books.
The method to delete this liability from the books of RBI’s issue department is to somehow ensure RBI’s obligation of exchanging these Rs 500 and Rs 1,000 denomination bank notes is done away with as well.
That can only be done through a new law or an amendment to the RBI Act, as the latter, in its current shape, remains silent on it.
Additionally Article 300A of the Constitution lays down that no person can be deprived of his/her property, except by the passage of a law. It cannot be done by a notification.
India has gone through demonetisation before in 1978 and this is how the liability of the RBI was done away at that time.
The then government passed the High Denomination Bank Notes (Demonetisation) Act, 1978. Through Section 3 of the Act, it took away the legal tender status of the particular denomination currency. Then through Sections 7 and 8 of the law, it also put a deadline till when RBI was obliged to exchange the particular bank notes, even if they were not ‘legal tender’.
Since RBI was no more obliged to exchange the bank notes after a certain date, it’s standing liability against those notes got extinguished in its account books.
This time, the government has done away with the legal tender status by notification but the next step to do away with RBI’s obligation to exchange the bank notes will have to necessarily be done by either a new law or an amendment to the existing RBI.
This law or amendment would have to specify the date till when RBI will exchange Rs 500 and RS 1,000 denomination notes.
Once the liability on RBI books against the destroyed or unreturned notes is deleted, it could then sell the assets it holds against the equivalent liability – in this case, largely US treasury bills. The income it receives from the sale of the US treasury bills would be booked as profits in its profit and loss account.
Excluding costs, the profit booked could then be transferred either to the general reserve of RBI or be transferred to the government as surplus or dividend. This would require an approval of RBI board. Once the dividend equal to the demonetised money not deposited is sitting on the government’s books, it could possibly use this credit to wipe out some of its fiscal deficit and expend more in the upcoming Budget.
In 1978, the government first brought an Ordinance to extinguish RBI’s liabilities and later the Ordinance was passed by Parliament. The NDA government, too, could take the Ordinance route after the current session of Parliament ends.
It is also being contended by experts if the government could introduce it in Parliament as a money Bill and bypass the Rajya Sabha where it does not have the numbers.
But others contend it may not legally pass muster as a money Bill because once the currency ceases to be a legal tender, the government’s guarantee against the particular currency ends and it would no more be a charge on the Consolidated Fund of India.
