Former Reserve Bank of India (RBI) governor D Subbarao has a warning for the government: the currency that is not deposited back during the current demonetisation drive should not be used up as profit for funding government fiscal needs or bailing out banks.
Subbarao, who was speaking at a MintAsia event in Singapore, said any such move resulting from the currency that is not surrendered is "ill-advised" and would send the wrong message, Mint reported.
Subbarao was addressing speculation that the Indian government could end up profiting from the demonetisation drive and use it for recapitalising banks or solving its fiscal issues. Under the current laws, any windfall resulting from the shortage of unreturned currency has to be transferred to the government by RBI if the latter records it as profit.
"Then demonetization will be viewed as being done with other motives, rather than fighting black money," Subbarao said.
That is subject to, however, if the RBI claims the windfall as a profit, he said. It's also unclear if the old notes still carry any legal obligation for RBI to pay the bearer any value as the government hasn't officially used the word "demonetisation," he said, pointing to the government announcement that only mentioned the old notes would stop being legal tenders.
The Congress Party has accused the government of using its current demonetisation drive as a cash resource to recapitalise public banks that are reeling under 6 lakh crore in non-performing assets and many loans outstanding from big corporate tycoons, the Hindu reported.
Senior Congress leader Kapil Sibal has said, "Of the roughly Rs. 16 lakh crore in the market, the currency notes of Rs. 500 and Rs. 1,000 account for 86 per cent or Rs.14.5 lakh crore. Of this, the government hopes to see Rs. 10 lakh crore placed in the banks. The balance Rs. 6 lakh crore will be generated by the RBI and placed at the disposal of the government. So you take money from the common man to clean the balance sheets of the banks to hide the gaddari [traitorous acts] of the industrialists."
Last week, PM Modi made a surprise annoucement scrapping Rs 500 and Rs 1,000 bank notes in an effort to stamp out black money from the economy.