What Modi planned with demonetisation and what became of it
On November 8, 2016, at 8pm, Prime Minister Narendra Modi used a speech telecast live to drop the “demonetisation” bomb. Rs 500 and Rs 1,000 notes were duly abolished from midnight.
One year has passed since. The demonetisation exercise has received more quotes than the total pieces of currency notes vacuumed out of the system. The most stinging and perhaps impactful one came from a man known for his silence – former Prime Minister Manmohan Singh, who called note ban an “organised loot and legalised plunder” – only to face a reverse volley of barbs from BJP of having overseen one of the most scandal-ridden black money-generating governments in India’s history.
Those who failed to curb black money despite being in a position to do so – men like former Union finance minister P Chidambaram – have used the last one year to build a public perception that demonetisation was a “whimsical”, “unprepared decision” that was “forced on the RBI”, thus eroding the credibility of the central bank like never before.
Post note ban, there has been an overload of data and figures. In a nation where per capita income in real terms (at 2011-12 prices) in 2016-17 was Rs 82,269, in India’s markets, chaupals, chai stalls, drawing rooms, board rooms and conference halls, the concept of “lakhs of crores, and billions” reached an amazing familiarity level.
The political narrative
During the last few months, I have heard “note ban was a flop” and “note ban wasn’t aimed at confiscating the cash in the system” many more times than Sonu Nigam heard a loudspeaker in his Mumbai mornings and erupted in anger.
Opposition counts the negatives. It says PM in his note ban address to the nation on November 8 mentioned black money nearly a dozen times. If 99 per cent of the money is back in the banks and the RBI is still counting, note ban was the biggest “government-certified laundering exercise” ever in the world. “Growth slumped to a three-year low”, “billions were lost in trade and commerce”, and “millions lost jobs” form the kernel of the anti note ban argument.
The government offers figures to extol the virtues of the exercise. “Tax and other departments detected 18 lakh suspect transactions and 2.09 lakh shell companies”, “Rs 13 lakh crore remonetised”, “1 lakh income tax notices sent to those who made suspicious deposits”, and so on.
Economy slowed down. The government says not due to note ban. On business loss due to lack of cash, the finance minister says: “The current account deficit rose, which shows people were buying.” Government dismisses job loss charges as “anecdotal references”, almost relieved over the fact that there is no emphatic job data in a country where overwhelming 836 million people live on a per capita consumption of less than Rs 20 a day (according to the findings of the, Arjun Sengupta report on the Conditions of Work and Promotion of Livelihood in the Unrorganised Sector) mostly in the unorganised sector.
The Congress failed to pin the government on the “anecdotal” barb on job loss as it is guilty of not building a mechanism to generate job data, if not jobs, in all the years it ruled from Delhi.
But if lack of data makes Opposition’s charge of millions of jobs lost due to note ban anecdotal, the government’s claim of not many jobs lost in the absence of good data is nothing more than myopia.
While the #November8BlackDay versus #AntiBlackMoneyDay hostilities have added to the political shelf life of demonetisation, more is now known about how the decision was taken and executed. To beat PM Modi in his den Gujarat, Congress VP Rahul Gandhi is using a sword with twin blades – demonetisation and GST. His charge is that note ban was an idea born in PM Modi’s mind – and the RBI and the government machinery were asked to blindly execute it.
Was RBI kept in the dark?
In the Opposition’s quiver, the sharpest arrow has been the charge that “PM Narendra Modi one fine morning thought - let’s ban Rs 500 and Rs 1,000 notes and all black money would be snuffed out. He sent out orders and the RBI responded with obedience,” the Opposition claims.
But was the RBI kept in the dark? Depositions by RBI governor before a parliamentary committee and other accounts have established that the board of the Reserve Bank of India had cleared the ban.
RBI Governor Urjit Patel is said to have explained the sequence of events that resulted in November 8's shock demonetisation drive.
Events hours before note ban
The current RBI governor’s account shows that on November 7, plans kicked into action at breakneck speed for 24 hours. Governor Urjit Patel in his deposition is said to have told Parliament’s Public Accounts Committee that the government had sent an advisory on November 7, 2016 to the RBI recommending note ban. To take up this advisory, the central bank's board, headed by Patel, met at 5.30pm on November 8 in New Delhi and after deliberations cleared the government's advisory note.
On November 8, things moved fast in a synchronised manner. At 5.30pm soon after the RBI board started its meeting on the government advisory to make Rs 500 and Rs1,000 notes illegal tender, the PM had his cabinet waiting in his office.
The prime minister was at his Lok Kalyan Marg residence while the ministers were waiting in his South Block office. The ministers were not allowed cellphones – a decision first introduced in July for cabinet meetings. The agenda of the meet was not known to them.
Sources say the Prime Minister's Office staff as well as the finance ministry team that knew what was coming were on edge waiting for news from the RBI's board, which was meeting in Delhi barely a few kilometres away.
The note ban advisory was unanimously cleared by eight of the RBI board’s 10 members (two were not present). Through a very guarded system, the board’s decision was conveyed to the PMO.
Armed with the RBI board’s yes, PM Modi drove from his home to his office and disclosed his huge reform to the cabinet, which formally took up the note ban as its agenda, and okayed it. Barely a few minutes later, at 8.00pm, Prime Minister Modi was uplinked for the national broadcast, addressing the country and announcing that Rs 500 and Rs 1,000 notes would cease to be legal tender at 0000 hours as Tuesday turned into Wednesday.
That is when India came to know that 86 per cent of its much-loved cash in circulation, Rs 15.44 lakh crores in volume, was no longer valid for transactions.
The RBI says “it was ready”. Eight of its 10 board members had cleared the proposal in New Delhi. The ninth member was abroad. The 10th was in the central bank's Mumbai headquarters, assigned to coordinate the immediate implementation of one of India's biggest-ever economic decisions.
Top sources say that while the final push was a sprint, the planning for the note ban was neither casual nor rushed. For months, detailed analysis of a plan, its scope and legal issues involved pros and cons, crisis management and timelines were pondered on.
Who all knew? How was the decision taken?
In his recently released book, I Do What I Do, Raghuram Rajan, appointed RBI governor by Congress-led UPA in September 2013, provides a deeper account of note ban planning. He says that demonetisation as an idea was on the discussion table since February 2016.
Sources say since May 2016, the then RBI chief and a deputy governor would fly down to Delhi regularly to hold extremely hush-hush meetings with a “core team of officials”, constituted by PM Modi from his own office and the finance ministry. The team was led by a senior finance ministry bureaucrat, and five others sworn to utmost secrecy. This team was supported by a young group of researchers working in two rooms at PM Modi’s New Delhi residence.
Sources say that as RBI governor, Raghuram Rajan was part of the discussions between May and August, and when his term ended, Urjit Patel replaced him.
The meetings, held nearly every Friday after 6pm, were detailed planning sessions that also tried to access and prepare for the consequences of the note ban. The prime minister wanted complete secrecy. Thus no minutes of any of the meetings between the RBI and the government’s core team were maintained.
The RBI involvement was deep. Its experts had prepared an exhaustive note enlisting the pros and cons of the note ban, what would be the impact, the preparation needed for a smooth sucking out of banned notes and remonetisation.
Urjit Patel told parliamentary panels that the RBI agreed with the government's assessment of the note ban as a deterrent against black money, terror-funding and counterfeiting of currency notes.
The Friday meetings were used to make elaborate blueprints. It was decided how right after the announcement, enforcement agencies like the income tax department and the enforcement directorate, which handles financial crimes, would be asked to start monitoring the monetary activities. Information about introduction of new series of banknotes, higher denomination Rs 2,000 notes, their size, security features, colour and design – was guarded zealously.
Exchanging “one-for-one”, for each piece of the banned Rs 500 and Rs 1,000 notes, was decided. RBI and the banking system was to be battle-ready to handle the new series notes to the tune of at least Rs 14 lakh crore, which meant not less than 22 billion new series notes. The blueprint included introducing 2 billion pieces of Rs 2,000 notes in place of banned 4 billion Rs 1,000 notes in circulation. 21 billion pieces of the new series Rs 500 notes were to be printed and stored at strategic locations to replace the old.
Currency printing is a more complex exercise than taking out xerox copies. The new Rs 2,000 notes and new series Rs 500 notes needed designing, procuring ink, paper, and other requisites. Sources say that even to build a critical inventory for the first post note ban month, a six-month-long exercise was needed.
One reason why the note ban couldn’t be announced earlier was the ongoing income declaration scheme (IDS). The scheme was limping and was to end by September. When the shutters came down on the IDS, only 64,000 odd declarants came forward with disclosures worth less than Rs70,000 crores. The government wanted to show its commitment to wipe out black money hadn’t weakened. UP Assembly election was nearing and the Opposition was already targeting the government for failing to fulfill its 2014 poll promise.
Sources claim that there was a minor hiccup in the printing of the new Rs 2,000 notes because of the change in RBI leadership. The decision to introduce the new high-denomination note to remonetise the economy reportedly was taken in June.
Sources say Prime Minister Narendra Modi and finance minister Arun Jaitley had cleared the design and security features of the Rs 2,000 and Rs 500 notes. But the new bills need the RBI Governor's signature. Raghuram Rajan’s term was ending in September and the new notes were to be introduced post note ban. So the printing of new notes was held up till Urijit Patel took office. As soon as he took charge, his signature was cleared and the printing of notes began.
The blueprint had factored in the initial gap between the high demand and low availability of cash. Calibration of two lakh plus ATM machines for the new notes was planned post note ban to “maintain secrecy”. The government and the RBI were prepared for criticism as ATM calibration in a short span of time with limited trained personnel was never going to be a quick fix. Cash distribution had to be equitable, but realising the high demand for cash in urban areas, hubs and sub-hubs in cities were identified. The number of direct distribution centres was to be increased threefold for replacing the old currency with the new.
The RBI currency management wings and the financial services department of the finance ministry (department of banking) worked and prepared for a long haul. The crisis mitigation plan included directing banks and other financial institutions to work extra hours on weekdays and even on weekends. Procurement of more counting machines by RBI and banks was put on the to-do list.
Through the banking system, the flow of low-denomination notes was to be increased. Hourly monitoring of all elements – printing of notes, stocks, supply transportation, demand and public access – was planned. Who will do what, when and how – was all put on paper.
Post note ban hiccups
One hard look at the discussion and planning shows RBI wasn’t a “surprised outsider” on November 8, 2016, as the Opposition claims. But did the RBI tow the government line and did the guardian of monetary policy take no independent view – is a question that still needs answers.
Despite the huge “bandobast”, note ban execution ran into huge problems. Serpentine queues, elders suffering waiting for cash, deaths at the doors of banks created a negative narrative and a political embarrassment for the government. RBI faced flak for repeated corrections and tweaks.
On the face of it, things didn’t ever look flattering for the government or the RBI. There were too many restrictions, relaxation, and reviews. There was a clear lack of understanding how people in a dynamic cash-intensive economy behave. Many even within the BJP now admit that the exercise was typical of a plan drawn up by top babus, who had long lost touch with street tricks and behaviours.
During note ban, the use of cash mules and poor’s zero-balance Jan Dhan accounts became the obvious and ordinary sleight of hand that those with black money employed. Shell companies, corrupt bank officials taking cuts to exchange large amounts during restrictions, chartered accountants acting as devious alchemists who could turn black money into white, hawala operators, bookkeepers, jewelers and more – forced the government and the RBI to issue over 50 notifications in 50 odd days.
Post note ban, the system handling an unprecedented move, never trained for such a measure, struggled. Many were too busy to check frauds. Rest hand-in-glove making a killing.
Note ban created a class divide. Black money comes from corruption. Poor are the first and worst victims of corruption. That’s why when Uttar Pradesh went to polls for the next Assembly in March 2017, demonetisation united those very poor who had little cash to run homes, and/or had lost their jobs, behind PM Modi – the architect of note ban. The risky economic move proved politically astute, as the poor hoped that a clean-up is in the making.
That’s is why political parties, and millions who smirk at or criticise demonetisation, need to be served a reminder. Beyond what PM Modi thought, how he planned and executed note ban or what his reasons were, demonetisation was in a way a citizen integrity test. After one year, it can be called only a “part success”, largely because many worked to defeat a clean-up. And not just because of the manner it was conceived, or executed.