Currency in circulation now is almost double that in use just before demonetisation: Chidambaram

The government’s argument is that demonetisation led to phenomenal growth in digital transactions.
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Reserve Bank of India (RBI) figures show ₹32.18 lakh crore currency in circulation now in India, almost double the ₹17.97 lakh crore of currency in use just before demonetisation in November 2016, senior advocate P. Chidambaram submitted before a Constitution Bench on Thursday.

Appearing before a five-judge Bench led by Justice S. Abdul Nazeer, Mr. Chidambaram was countering the government’s argument that demonetisation was a “transformational economic policy step” which led to a phenomenal growth in digital transactions.

The government claimed that the withdrawal of ₹500 and ₹1,000 banknotes, which had at the time formed more than 80% of the currency in circulation, was a “critical” part of a policy push to “expand formal economy” and thin the ranks of the informal cash-based sector.

The Ministry had said, post demonetisation, the volume of digital payment transactions had increased from 1.09 lakh transactions of value of ₹6,952 crore in the entire year of 2016 to 730 crore transactions of the value of more than ₹12 lakh crore in the single month of October 2022.

Quoting RBI figures to make his point, Mr. Chidambaram said “in times of distress the people fall back on currency”.

“It is completely wrong to say advanced countries have become cashless… currency in circulation has increased. Since 2016, currency represented an overwhelming or large part of payments. There is more cash with the people… That is economic logic,” the senior advocate led submissions for petitioners who have challenged demonetisation in 2016.

He said as GDP grew, there would be more people with more income. There would be a requirement for more currency.

“That is why the right to issue currency is given to one independent authority, the RBI, which has a huge section which researches and decides what is the cash in circulation that people need to carry out their daily activities,” Mr. Chidambaram submitted.

‘Continue to grow’

He said the need to issue more currency would continue to grow.

“Simply by demonetisation, you withdraw over 80% of the currency… it does not mean people do not require currency. They do. As you can see, ₹17.97 lakh crore has ballooned to ₹32.18 lakh crore… With humility, I can make the prediction that it will continue to grow and it ought to grow,” Mr. Chidambaram said.

He said that withdrawal of 86.4% of currency of ₹500 and ₹1,000 denominations in 2016 left people with only about ₹2 lakh crore as legal tender in 2016.

“Obviously, people were put to tremendous hardship, ₹2 lakh crore was not enough to sustain the lives of 125 crore people… to buy, sell, take or give loans, etc,” Mr. Chidambaram said.

He said the value of currency in circulation was determined only by the RBI. The government did have the power to demonetise, but only if the RBI gave the go-ahead.

He said the power to issue currency was not given to the executive government for a purpose.

“Any executive government can starve people of cash and cripple their daily activities by not putting enough cash in circulation. This is why the RBI Act in 1934 gave the right to issue currency only to the RBI… They will decide,” Mr. Chidambaram said.

But neither the Central Board of the Reserve Bank of India nor the Union Cabinet had full information with respect to the monumental consequences of demonetisation. Documents had not been put in the public domain.

The stated objectives of demonetisation, curbing counterfeit and ending terrorism, had not been realised.

“Impact of a government action cannot have any bearing on its legality,” Justice B. R. Gavai on the Bench said.

“Government action can be tested on proportionality… If there is one major economic decision taken in about 10-20 years which affected the lives of all citizens, it is demonetisation… Time cannot be turned back, but an act can be declared unreasonable,” Mr. Chidambaram replied.

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