by Meera Sanyal
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I have just asked for 50 days for demonetization work. Dear countrymen, please give me these 50 days. I am not demanding anything else. If you face any difficulty after that, if you find me dishonest in my effort, you can punish me in whatever way you would wish to, at any crossroad of the country.
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Once the country becomes clean within these 50 days, then we need not be worried even about a single corrupt mosquito… Those who didn’t throw a penny in the waters of Ganga are sinking their bundles in it… You are now witnessing people accused of 2G Scam and Coal Scam standing in queue to exchange their currency and get `4,000.
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These measures are inevitable if the condition of honest and poor people of the country is to be improved. This I will implement for the poor, for their better health, for their better education, for household, for providing medicine to the elderly.
Meanwhile, as members of Parliament reacted in shock and anger to the chaos caused by demonetization, and reports of deaths of people standing in queues started pouring in, the Parliament’s winter session that commenced on 16 November 2016 was disrupted, no business was transacted, and crucial bills such as the GST implementation bill did not get passed.
Nevertheless, notwithstanding the noisy scenes in the Parliament and the ever-lengthening queues outside banks, the citizens of India remained stoically calm. Many continued to profess their support for the move, despite the obvious inconvenience they were compelled to face.
At the same time, stories began emerging on the ‘conversion crorepatis’. Reports of highly innovative methods of money laundering6 came in from across the country. Highly publicized and vulgarly ostentatious weddings7 of the children of prominent politicians also started making the headlines.
As the common citizen struggled with withdrawal limits and an acute shortage of cash, national media carried out a series of sting operations. Videos, which soon went viral on social media, showed how the new notes meant for the public were being shamelessly siphoned off by bankers in collusion with corrupt politicians and businessmen.8 The mood of a silent public, who had borne the pain of demonetization in the hope of a cleaner India, slowly began to turn.
To counter this, the Finance Minister and other officials of the Ministry of Finance (MoF) started making statements on the tax penalties that would be levied on people depositing excessive amounts of cash in their accounts. Frequent contradictions in their statements led to further confusion and the fear that a new income tax ‘raid-raj’ would be unleashed on the country.
On 22 November, the Prime Minister launched a poll on his personal NAMO App, asking people whether they supported the demonetization. The IT and Telecom Minister, Ravi Shankar Prasad, shared the survey results on 23 November. He said that more than 93 per cent of the five lakh people who participated in the survey supported demonetization.
Prominent economists, both in India and abroad, were vocal in their criticism of the move.
The strong words of the mild-mannered and courteous former Prime Minister, Manmohan Singh, set the tone when he said, ‘The GDP can decline by about two per cent as a result of what has been done… the way this scheme has been implemented is a monumental management failure, and in fact, it is a case of organized loot, legalised plunder of the common people.’9
Nobel laureate Amartya Sen said, ‘Only an authoritarian government can calmly cause such misery to the people – with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back.’ And ‘Demonetization goes against trust. It undermines the trust in the entire economy.’10
Lawrence Summers commented: ‘It is petty fortunes, not the hugest and most problematic ones, that are being targeted. Without new measures to combat corruption, we doubt that this currency reform will have lasting benefits.’11
Kaushik Basu called the policy ‘Poorly designed, with scant attention paid to the laws of the market.’ He further said, ‘Demonetization was ostensibly implemented to combat corruption, terrorism financing and inflation – these justifications are flawed.’12
Debunking the theory that this demonetization was based on his prescription of a cashless economy, Harvard economist and author of The Curse of Cash, Kenneth Rogoff, said unambiguously, ‘My plan is explicitly tailored to advanced economies. The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large.’13
However, there were others who praised the move. Columbia University’s Professor Jagdish Bhagwati called it, ‘A courageous and substantive economic reform, whose potential benefits could include shrinking the shadow economy, hurting terrorists and counterfeiters, and expanding the tax base by digitizing many economic transactions.’14
Arvind Virmani, former chief economist and Indian representative to the International Monetary Fund (IMF), backed the move, stating, ‘Demonetization is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations.’15
Bibek Debroy said, ‘Critics are unaware of the situation on ground, the extent of financial inclusion that has been undertaken by the Modi government, and how the revenue generated will help in enhancing public investment.’16
Other Indian economists argued that this could root out corruption and make campaign finances more transparent. Yet others viewed demonetization, with its massive infusion of low cost funds into banks, as a quick way to invigorate India’s banking sector, reeling under a massive burden of bad loans and non-performing assets (NPAs).
The thinking press was almost uniformly scathing in its comments on the move.
Calling it a ‘Great Leap Backward’, Amit Varma wrote: ‘It doesn’t achieve its intended purpose. And its unintended consequences could devastate the lives of the poor, and cripple our economy… Corruption and black money are a consequence of big government, of one set of individuals having discretionary powers over the actions of others. If Modi was serious about tackling black money, he’d bring about institutional changes that would take us towards the minimum government he had promised in his 2014 campaign. Instead, government keeps getting bigger, controlling more and more of our lives. More government = more corruption.’17
One of the most scorching indictments of demonetization was by influential publisher Steve Forbes: ‘Not since India’s short-lived forced-sterilization programme in the 1970s has the government engaged in something so immoral… Money represents what people produce in the real world. It is a claim on products and services… What India has done is commit a massive theft of people’s property without even the pretense of due process.’18
Commenting on how the move had shaken the trust of people, Devangshu Datta commented, ‘Trust in state and policy consistency must be high if you’re going to keep your money dematerialised. You must believe that the state will not suddenly act in arbitrary fashion to freeze your account, or simply expropriate everything. If the said state withdraws 86 per cent of the currency, issues 180 notifications in 20 days, and passes a new IT Bill inside five minutes with no debate, it is hard to trust it.’19
The Economist called the exercise ‘A cautionary tale of the reckless misuse of one of the most potent of policy tools: control over an economy’s money,’ adding wryly, ‘The sleepless are those who need cash to get by; the truly rich are laughing all the way to their flats in London.’20
Ajay Shah, explaining that money was the lubricant of the economy and that a shock to money supply would fatally wound small and medium firms, said, ‘Once firm failure has happened, it cannot be undone. You can turn an aquarium into fish soup, but you cannot turn fish soup back into an aquarium. Flooding the economy with money supply afterwards would not bring back those firms to life.’21
While critics and supporters argued on the pros and cons of the move, there was utter confusion
on the numbers. There was no clarity on how many new notes had been printed either during the 10-month planning period or after 8 November 2016, nor about when they would be made available to the public.
With respect to the cash being returned, the RBI initially posted frequent updates on the quantum and value of the old `500 and `1,000 being deposited in the banks. The number rose from `5.44 trillion22 on 18 November to `8.45 trillion on 27 November and further to `11.55 trillion on 5 December 2016.
However, as the tsunami of deposits into banks continued, data from the RBI started to dry up. Their last official announcement stated that a total sum of `12.44 trillion had been deposited in the RBI’s currency chests as on 10 December 2016.23 Thereafter, the RBI steadfastly refused to provide any numbers, stating on 5 January 2017: ‘Figures would need to be reconciled with the physical cash balances to eliminate accounting errors/possible double counts etc.’ and that till then ‘any estimate may not indicate the actual numbers.’
The nation had to wait till 30 August 2017 for the RBI to disclose in its Annual Report for 2016–17 that `15.28 trillion (i.e., 98.96 per cent) of the currency rendered invalid on 8 November 2016 had come back into the Indian banking system. However, this was also a provisional number.
It was only on 29 August 2018 that the RBI24 revealed, in its 2017–18 Annual Report, the final figures. Of the total `15,417.93 billion (15.41 lakh crores) demonetized notes, `15,310.73 billion (15.31 lakh crores) had been returned, which represented 99.35 per cent of the demonetized currency. The value of notes not returned was `10,720 crore (10.72 billion), a mere 0.65 per cent!
In retrospect, it appears that the RBI was reluctant to release data because the Demonetization 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 clearly not being supported by data, the data itself was not being released. It was evident that the math of demonetization 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 demonetization, why 8 November 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 demonetization would cripple the opposition parties, thus facilitating a BJP victory in this important state.25
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 criticizing 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…’26
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 15 November, 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.27
The allegations and documents were reminiscent of the infamous ‘Jain Hawala diaries’ case. In 1991, a businessman, S.K. 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.’28
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 demonetization been announced and implemented in such a hurry, when preparations for such a drastic move were clearly inadequate?’29
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 30 December deadline grew nearer, the decisions of the government grew more erratic. In a bizarre move, the RBI issued a circular on 19 December30 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 circular31 two days later, on 21 December, albeit only for ‘fully KYC compliant accounts’.
The goalposts of demonetization 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 30 December, when the demonetization 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 31 December, people eagerly expected a report card of the 50-day demonetization 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,32 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 demonetization 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 demonetization was an unmitigated disaster. On 13 November, 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 remonetizing the economy. To have subjected the Indian economy and 1.3 billion Indians to the liquidity crisis
that followed the note ban was simply unforgiveable.
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 remonetize 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 demonetization 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.33
It was a classic case of the road to hell being paved with good intentions.
2
The Role of the RBI
The central bank figures only after the army in terms of perception as a custodian of society’s trust.
– Y.V. Reddy, Governor of the Reserve Bank of India 2003–2008
In my role as CEO and Chairperson of ABN AMRO and RBS in India, I had frequent interactions with the RBI at many levels, and had the opportunity to work with three RBI Governors – Y.V. Reddy, Duvvuri Subbarao and Raghuram G. Rajan.
