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Okaying note ban, RBI rejected govt claim on black money, fake notes

Two years after demonetisation

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New Delhi : Less than four hours before Prime Minister Narendra Modi announced demonetisation on November 8, 2016, the Central Board of the Reserve Bank of India (RBI) gave its approval to the scheme but also rejected, in writing, two of the key justifications — black money and counterfeit notes — that he would make in his televised address to the nation.

The minutes of the 561st meeting of the RBI’s Central Board, which was convened hurriedly in New Delhi at 5.30 pm that day, reveal that the central bank’s directors described the move as “commendable” but also warned that demonetisation “will have a short-term negative effect on the GDP for the current year”.

The minutes were signed by RBI Governor Urjit Patel on December 15, 2016, five weeks after the meeting was held. In all, six objections, described as “significant observations”, were recorded in the minutes by the RBI Board.

The RBI directors, after receiving a proposal draft of the scheme from the Ministry of Finance on November 7, 2016, argued that the government’s reasoning, that the withdrawal of HD (high denomination) currency notes of Rs 1,000 and Rs 500 would help in curbing black money and restrict circulation of counterfeit cash, did not really hold good.

The minutes list out the justifications given by the Ministry of Finance.

On demonetisation curbing the flow of black money — the minutes recorded the facts and figures given in the government’s White Paper on Black Money — the Board noted: “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.”

On fake currency, the Ministry informed the Board that counterfeiting is on the rise in denominations of Rs 1,000 and Rs 500, and the total quantity of such currency is estimated to be around Rs 400 crore.

In its counter, the RBI Board noted that “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”.

Two years after demonetisation: Okaying note ban, RBI rejected govt claim on black money, fake notes Reserve Bank India governor (RBI) Urjit Patel attends a news conference to announce quarterly credit policy at the RBI head office in Mumbai. (Express photo by Prashant Nadkar)

Among the other counter-points, the Board recorded that the growth of the Indian economy and its linkage to the high amount of HD currency in circulation, as pointed out in the government’s proposal, was flawed since the rate of inflation had not been taken into consideration.

The minutes of the meeting noted: “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 Board also put in writing that it envisaged that the withdrawal of HD currency notes would have a negative impact on two sectors in particular: medical and tourism.

Thus, it pointed out, private medical stores should also be included in the exemption list.

Recording the problems that incoming tourists may encounter, the RBI directors noted: “Arriving domestic long distance travelers who may be only carrying high denomination notes will be taken by surprise at railway stations/airports for payment to taxi drivers and porter charges and hence put to hardship. It would also have adverse effect on tourists.”

The minutes include an “assurance” that the issue of demonetisation was under discussion between the central government and the RBI for six months during which “most of these issues had been discussed”.

The RBI Governor also recorded that apart from the stated objectives, “the proposed step also presents a big opportunity to take the process of financial inclusion and incentivising use of electronic modes of payment forward as people can see the benefits of bank accounts and electronic means of payment over use of cash…”
The minutes were signed off with the RBI’s resolution for the withdrawal of banknotes of Rs 1,000 and Rs 500. But with the following lines on record: “The Board was assured that the Government will take mitigating measures to contain the use of cash… the Board considered the memorandum and after detailed deliberations concluded that in larger public interest, the balance of advantage would lie in withdrawal of legal tender status of Rs 500 and Rs 1,000 currency notes currently in circulation…”


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Jaitley was told of Urjit Patel’s decision to quit only minutes in advance

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New Delhi : Monday was supposed to be a good day for the government. It announced the Cabinet’s decision to raise the Centre’s contribution to the National Pension Scheme for its employees, and was expecting the UK’s decision on extradition of fugitive liquor baron Vijay Mallya. But things changed after 5 pm when Reserve Bank of India Governor Urjit Patel’s resignation hit the RBI website.

Highly-placed sources in the government say that none of the senior ministers had any inkling of Patel’s resignation. Even Finance Minister Arun Jaitley came to know about it minutes before Patel quit.

The government will soon form a panel to search for a new RBI governor, an official said. RBI’s deputy governors, former government officials and top bankers and economists could be considered.

“The government acknowledges with deep sense of appreciation the services rendered by Dr Urjit Patel to this country both in his capacity as the Governor and the Deputy Governor of The RBI. It was a pleasure for me to deal with him and benefit from his scholarship. I wish Dr Patel all the very best and many more years of public service,” Jaitley tweeted, around an hour after Patel quit. Moments later, Prime Minister Narendra Modi tweeted.

While Patel cited ‘personal reasons’ for his exit, former officials who’ve worked alongside him and current officials involved with the events of the past few months acknowledge that the reasons were different.

“He did not thank the government in his statement, did he?” asked an official, when contacted by Business Standard. “We all know what has been happening in the past few months.”

Sources in the government say the resignation is all the more surprising after the last board meeting, which was a cordial affair by all accounts, and a resolution was reached on two contentious issues.

The central bank decided to refer the issue of RBI’s excess capital to a committee. The constituents of the committee and its terms of reference are still being discussed by the government and the RBI. The RBI also referred its prompt corrective action norms to its Board of Financial Supervision. The next Board Meeting is scheduled for December 14.

“It is sad and unfortunate,” said a former secretary to the government, who did not wish to be named as he still works with the government in another capacity. “I thought they could resolve their differences. (Former RBI governor) Raghuram Rajan had informed the Prime Minister and the Finance Minister that he will not seek an extension, as per convention. It is one thing to feel uncomfortable with an individual, and have a conflict with him. It is another to have him been pressured through the RBI board which has all your nominees. He must have felt that this creates a perpetual state of conflict and hence his position becomes untenable.”

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Government’s contribution under NPS to be raised to 14% from 10%, entire 60% of withdrawals to be tax-free

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New Delhi: The Union Cabinet on Monday approved a few changes in the National Pension System (NPS) under which the mandatory contribution by the central government for its employees covered under NPS Tier-I will be hiked from the existing 10 percent to 14 percent.

The tax exemption limit for lump sum withdrawal on exit has been enhanced to 60 percent. With this, the entire withdrawal will now be exempt from income tax. At present, 40 percent of the total accumulated corpus utilized for purchase of annuity is already tax exempted. Out of 60 percent of the accumulated corpus withdrawn by the NPS subscriber at the time of retirement, 40 percent is tax exempt and balance 20 percent is taxable.

The Cabinet also decided that contribution by the government employees under Tier-II of NPS will now be covered under Section 80 C for deduction up to Rs. 1.50 lakh for the purpose of income tax at par with the other schemes such as General Provident Fund, Contributory Provident Fund, Employees Provident Fund and Public Provident Fund provided that there is a lock-in period of 3 years.

Under NPS account, two sub – accounts – Tier I and II are provided. Tier I account is mandatory and the subscriber has option to opt for Tier II account opening and operation. Tier – II account is a voluntary savings facility available as an add – on to any Tier – 1 account holder. Subscribers will be free to withdraw their savings from this account whenever they wish.

The proposed changes to NPS would be made applicable immediately once time critical decisions are taken in consultation with the other concerned Ministries / Departments, an official release said.

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Huawei CFO seeks bail on health concerns; Canada wants her in jail

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Toronto/Beijing: A top executive of China`s Huawei Technologies Co Ltd argued that she should be released on bail while awaiting an extradition hearing, citing fears for her health while incarcerated in Canada along with other factors, court documents showed.

Huawei Chief Financial Officer Meng Wanzhou is fighting to be released on bail after she was arrested on December 1 in Vancouver at the request of the United States.

Meng, 46, faces U.S. accusations that she misled multinational banks about Huawei`s control of a company operating in Iran. This deception put the banks at risk of violating U.S. sanctions and incurring severe penalties, court documents said.

China has criticized her detention and demanded her immediate release. The arrest has roiled global markets as investors worried it could torpedo attempts to thaw trade tensions between Washington and Beijing.

In a sworn affidavit, Meng, the daughter of Huawei`s founder, said she is innocent of the allegations and will contest them at trial in the United States if she is surrendered there.

Meng said she was taken to a hospital for treatment for hypertension after being detained. She cited hypertension as a factor in a bail application seeking her release pending an extradition hearing. She also said she has longstanding ties to Vancouver dating back at least 15 years, as well as significant property holdings in the city.

Her family also sought leave to remain in Vancouver if she was granted bail, according to the court documents, with her husband saying he plans to bring the couple`s daughter to Vancouver to attend school during the proceedings.

Earlier on Sunday, China`s foreign ministry summoned the U.S. ambassador to lodge a “strong protest” over the arrest, and said the United States should withdraw its arrest warrant.

Chinese Vice Foreign Minister Le Yucheng told U.S. ambassador Terry Branstad that the United States had made an “unreasonable demand” on Canada to detain Meng while she was passing through Vancouver, China`s Foreign Ministry said.

“The actions of the U.S. seriously violated the lawful and legitimate rights of the Chinese citizen, and by their nature were extremely nasty,” Le told Branstad. He made similar comments to Canada`s ambassador the night before.

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