Demonetisation: the note ban is simply unforgivable

It was only on August 29, 2018, that the RBI revealed, in its 2017–18 Annual Report, the final figures. Of the total ₹15,417.93 billion (15.41 lakh crores) demonetised notes, ₹15,310.73 billion (15.31 lakh crores) had been returned, which represented 99.35% of the demonetised currency. The value of notes not returned was ₹10,720 crore (10.72 billion), a mere 0.65%!

In retrospect, it appears that the RBI was reluctant to release data because the Demonetisation Dividend that had been so exuberantly promised was turning out to be a mirage. Since the government’s assumptions on both black money and counterfeit currency were not clearly supported by data, the data itself was not being released. It was evident that the math of demonetisation had gone horribly wrong.

As money continued to pour into the banks, everyone could see that black money was neither being burnt nor drowned in the Ganga. It appeared that either there was no black money in India or, more likely, it was swiftly being laundered into white!

While the subsequent events are clear, what is not so clear is who planned the demonetisation, why November 8 was selected as the date, and on whose advice and on what assumptions this major decision was taken.

There were several theories as to the motives behind the move.

One concerned the upcoming Uttar Pradesh elections, scheduled for February–March 2017. By taking out of circulation any cash they may have gathered to fight the elections, the hypothesis was that demonetisation would cripple the opposition parties, thus facilitating a BJP victory in this important state.

Another was that Prime Minister Modi wished to be seen as taking strong action against black money. Former supporters of the Prime Minister, such as veteran lawyer Ram Jethmalani, had been vocal in criticising him for not keeping his 2014 election promise on black money: ‘The one promise he had made was that ₹90 lakh crore of black money was concealed in foreign banks and that he will get back that money and give ₹15 lakh to the family of every poor man...’

A third theory was that the decision was taken to divert attention from a potentially disastrous revelation that could affect the reputation of the Prime Minister. It was given credence by the allegation by the Delhi CM, on the floor of the Delhi legislative assembly on November 15, that documents seized during raids by the income tax department purported to show that the Prime Minister had received bribes during his tenure as the Chief Minister of Gujarat. On the same day, senior advocate Prashant Bhushan, through his NGO Common Cause, filed a petition in the Supreme Court (SC) presenting the data from these income tax raids, requesting action against those whose names featured in the documents.

The allegations and documents were reminiscent of the infamous ‘Jain Hawala diaries’ case. In 1991, a businessman, SK Jain, was arrested. During the search of his residence, a handwritten diary was recovered which contained notations of payments amounting to ₹65 crore made to 115 individuals. The recipients’ names were written in code, but they matched the initials of some of the senior-most political leaders of the country. In a landmark judgement related to this case, the Supreme Court ruled in 1997: ‘Whenever any record indicating illegal payments to public functionaries is recovered by any government agency, a thorough and independent investigation must be undertaken.’

During the course of the next few weeks, Rahul Gandhi, the leader of Congress, and Sitaram Yechury, leader of the CPI(M), reiterated the allegations of corruption against Prime Minister Modi. Implicit in these allegations was the answer to a question being raised across the country: ‘Why had the demonetisation been announced and implemented in such a hurry, when preparations for such a drastic move were clearly inadequate?’

However, overturning the principle laid down by the SC in the Jain Hawala case, and apparently bringing this controversy to a close, on 11 January 2017, a bench consisting of Justices Arun Mishra and Amitava Roy dismissed the Common Cause petition, stating, ‘No democracy can function when allegations are cast against constitutional functionaries without cogent evidence.’

As the December 30 deadline grew nearer, the decisions of the government grew more erratic. In a bizarre move, the RBI issued a circular on December 19 stating that all further deposits would have to be made as a single lump-sum deposit, and that any amount in excess of ₹5,000 would be investigated by two bank officers, who could question the reason for the ‘delay’ in depositing the money.

People reacted with disbelief and outrage. They felt betrayed, because the Prime Minister and the Finance Minister had personally asked people not to crowd the banks, as they had until 30 December to deposit notes. Faced with a barrage of criticism, the RBI withdrew this circular two days later, on December 21, albeit only for ‘fully KYC compliant accounts’.

The goalposts of demonetisation also started getting shifted. Seeing it was not delivering on the goals of eradicating black money, corruption, counterfeit notes and terrorism, the rhetoric began to centre around making India a digital, cashless economy, of widening the tax base, and formalizing the economy.

On December 30 , when the demonetisation window closed, everyone hoped that the RBI would finally release some numbers. But, there was complete radio silence. So, when there was an announcement that the Prime Minister would address the nation on December 31 , people eagerly expected a report card of the 50-day demonetisation exercise – the quantum of black money and counterfeit money that had been detected and destroyed and the promised benefits that would now accrue to them.

They were to be disappointed. No report card or numbers were shared, and other than a few token incentives, no benefits either. The nation had suffered patiently for the 50 days requested by the Prime Minister, in eager anticipation of the benefits he had promised. The year ended on a sombre note as it started becoming clear to people that their pain, loss of income, disruptions of jobs, inconvenience and sacrifice had been in vain.

My Perspective

From a purely objective perspective, every patriotic Indian supported the objectives stated by the Prime Minister, namely, eliminating the scourge of black money and corruption, flushing out counterfeit notes, and choking terrorist funding.

Whether demonetisation was the correct policy tool to achieve these objectives is debatable, as is the government’s report card in achieving its stated objectives. These are discussed in later chapters.

But there can be no difference of opinion on the fact that in its implementation, the 2016 demonetisation was an unmitigated disaster. On November 13, the Prime Minister had stated in Goa that the move had been in the planning for 10 months. There is, therefore, no excuse for the shoddy implementation and enormous delays that took place in re-monetising the economy. To have subjected the Indian economy and 1.3 billion Indians to the liquidity crisis that followed the note ban was simply unforgivable.

Irrespective of the policy merits or demerits of the move, the crushing effects of the liquidity crisis unleashed in November 2016 could have been avoided if adequate new notes had been printed prior to the announcement. Ten months was more than sufficient time to print an adequate quantity of ₹2,000 and ₹500 notes to replace the withdrawn notes swiftly. Having sufficient notes to remonetise the system was a basic precaution which should have been planned for.

If the new ₹2,000 notes had been printed in the same size as the old ₹1,000 notes, and the new ₹500 notes in the same size as the old ₹500 notes, the recalibration of 2,20,000 ATMs across the country could have been quicker. Augmenting the capacity of the 4,075 currency chests across India would have helped ensure quicker and more equitable distribution of cash across the country and faster counting of the demonetized notes as they were returned.

The fact that none of these simple and expedient measures was taken indicates that the planners of the note ban were appallingly incompetent.

As the financial and human costs of demonetisation began to add up, it became painfully clear that what had been intended as a surgical strike on black money had regrettably turned out to be a carpet-bombing of the Indian people and our economy.

It was a classic case of the road to hell being paved with good intentions.

This extract from The Big Reverse by Meera R Sanyal has been taken with permission from Harper Collins