Aakar Patel | In 2016, RBI had warned Demo will not work, but govt ignored it

Demonetisation’s anniversary came and went, without any defence of the masterstroke from the government. “Notebandi” was the idea of a man with a diploma in mechanical engineering from Latur, Maharashtra. Anil Bokil runs an institution called “ArthaKranti” (economic revolution), and calls himself as an economic theorist. His thinking: In a country like India where 70 per cent of people survive on just Rs 150 per day, why do we need currency notes of more than Rs 100?

He revealed in an interview days after Prime Minister Narendra Modi abolished 86 per cent of India’s currency how the PM got the idea. In July 2013, soon after Mr Modi was declared the BJP’s PM candidate, Mr Bokil went to Ahmedabad with his colleagues and made a presentation about an “ArthaKranti” proposal. Mr Modi gave Mr Bokil 10 minutes. “By the time I was done, I realised he had listened to me for 90 minutes. He said nothing after I made my presentation,” he said. This isn’t surprising. The idea that a simple, magical and transformational action could be executed would have transfixed Mr Modi. On the “ArthaKranti” website, the benefits of demonetisation conveyed to Mr Modi are listed: “Terrorist and anti-national activities would be controlled, the motive for tax avoidance would be reduced, corruption would be minimised, (also) a significant growth in employment”. What’s not to like? But there are no details about any of this nor how demonetisation would be executed and its benefits achieved. There is no reference to or analysis of what the fallout could be. ArthaKranti also proposed withdrawing the entire taxation system in favour of a transaction tax, with a Rs 2,000 limit on cash transactions. Its ideas were reductive, simplistic and, apparently, easy to implement. It was perfect for Mr Modi, who picked out the single most dramatic element from this: demonetisation.

In his speech on November 8, 2016, Mr Modi said India’s problems were corruption, black money and terrorism. Strong steps must be taken against these, and he would take them. Indians were honest but India was corrupt, and so a decisive step was needed against corruption, black money and terrorism. Had people ever thought about where money for terrorism came from, Mr Modi asked. It came from Pakistan’s counterfeiting operations in India, which was proved by the frequent arrests. He said the circulation of cash was linked to corruption: this was why Rs 500 and Rs 1,000 notes were between 80 per cent and 90 per cent of the total currency. He was cancelling them as legal tender in four hours, at midnight. That meant “such notes currently in the hands of anti-national people would become worthless”. Mr Modi acknowledged there would be some discomfort through this policy, but it wouldn’t be a problem. Ordinary citizens, he said, were enthusiastic about sacrifice and hardship for the country. No preparation was made by various departments and we know this because the Cabinet was summoned on November 8 and ministers were told to leave their mobiles behind so the act could remain secret till it was announced. Since ministers didn’t know, their departments didn’t know and nobody prepared, just as in the national lockdown of 2020.

Mr Modi had been specifically warned by the RBI, the body that actually had to demonetise the notes of currency its governor guaranteed with his signature and was arm-twisted into doing so, that demonetisation was a mistake. Raghuram Rajan resigned as governor after having discussed and disapproved of this move. The new governor, Urjit Patel, was forced to accept it by Mr Modi within weeks of taking office. He then refused to release the minutes of the meeting the RBI urgently held on 5.30 pm on November 8 (just before Mr Modi’s speech) to approve the unhinged move, citing national security and a “threat to life”.

When the minutes were finally leaked to the press two years later in November 2018, Mr Patel quit and left the following month. The RBI minutes said it was told by the government that:

*The economy had grown 30 per cent between 2011 and 2016 but the currency notes of higher denomination had grown at a much higher rate.

*That cash was the facilitator for black money.

*That counterfeit money of around Rs 400 crores was in the system.

*Therefore, the Rs 500 and Rs 1,000 notes should be made invalid.

The RBI’s response to the government was:

*That the economic growth referred to by the government was real while the rise in currency was nominal and not adjusted for inflation and “hence this argument does not adequately support the recommendation” for demonetisation.

*That most black money was in land or gold and not cash, and abolishing currency would have no effect on curbing black money.

*That demonetisation would have a negative impact on GDP.

*That Rs 400 crores in counterfeit currency was insignificant (only 0.02 per cent) compared to the total cash in circulation: Rs 18 lakh crores.

Having said all this, the RBI board nonetheless put its rubber stamp on Mr Modi’s idea. The reason why it fought to keep this capitulation secret is clear. It had done its job in pushing back and pointing out the flaws; it was now protecting Mr Modi. That is why Urjit Patel shamefully claimed there was a national security reason why he could not reveal the minutes, when RTI activists sought to access them. Of course, events proved that on every count the RBI had accurately predicted both the damage and the lack of benefit. What the RBI was hiding was the fact that Mr Modi had ignored its concerns — all of which turned out to be true — and gone ahead anyway.