By Vijay Darda | 16-01-2017
On November 8th, last year when prime minister Narendra Modi announced his bold political initiative to withdraw 86 per cent of the currency in circulation from the economy, there was no doubt that the Reserve Bank of India which is tasked with the responsibility of currency management operations was made to sign on the dotted line. We have been told that secrecy of the decision was a prime consideration for its success, and thus only a few people knew about it.
After the demonetisation decision, several former RBI governors including former prime minister Manmohan Singh and ex-RBI governor Bimal Jalan have been critical of the manner in which the government has treated the RBI. It needs to be mentioned that among the global central banks for the last 88 years, the RBI has assiduously built a reputation for independence and professionalism. It is also abundantly clear that the Modi Sarkar would not have been able to implement the demonetisation policy under the most outspoken previous RBI governor Raghuram Rajan. At the 20th Lalit Doshi Memorial Lecture on “Finance and Opportunity in India,” Rajan had said: “It (demonetisation) is often cited as a solution to get black money out of circulation. Unfortunately, my sense is the clever find ways around it, and it is not that easy to flush out the black money. They (people) find ways to divide their hoard into so many small pieces. You do find that people who haven’t thought of a way to convert black into white, throw it into Hundi in some temples. I think that there are ways around demonetisation.”
But this time around the problem is that the RBI does not have to do with the lack of prior consultation by the Modi Sarkar before taking the decision. On the contrary, it is a move by the finance minister to send a joint secretary to the RBI for the currency chest operations that has the unions up in arms. Protesting against the move and calling upon the RBI governor Urijit Patel to protect the 88-year-old institution’s autonomy and operational jurisdiction, the unions that have been pained by these developments have said: “The finance ministry’s move to send its official to the central bank was ‘most unfortunate’ and government interference was ‘absolutely unacceptable’ and ‘deplorable’. The central bank has been managing its duty of currency management efficiently since 1935 and the RBI staff had done an excellent job managing withdrawal of old notes. But it was “painful to note that RBI is being criticised from many quarters, for its ‘operational mismanagement’, by the press and many important personalities. Its autonomy and image have been dented beyond repair. Such critics include even former RBI governors. An image of efficiency and independence that RBI assiduously built up over decades, by the strenuous efforts of its staff and judicious policy-making, has gone into smithereens in no time.”
There has been an interesting disclosure from the Sena leader Suryakant Mahadik who heads the United Forum. He said, “Our employees were never consulted on the demonetisation issue. There is a department of cash management headed by Deputy Governor R Gandhi and he was told about this only five hours before demonetisation decision was taken. We are not against Narendra Modi or his decision, we don’t want dictatorship. India is a democracy. The PM never consulted anyone.” He said that if there had been adequate notice then things like printing of new notes could have been done properly. Perhaps, it was this mismanagement on the part of the Modi Sarkar that led to 60 circulars (often contradictory) being issued in 50 days.
The slow pace of currency replacement by the RBI is one of the main reasons for the public criticism faced by it. After the government’s decision to withdraw Rs 500 and Rs 1000 notes from circulation on November 8, it pulled out 86 per cent of the currency in circulation the regulator and the banking sector has been working to replace this currency. According to media reports, the value of new notes in circulation stood at Rs 9.14 lakh crore as on December 30 which is just 52 per cent of the Rs 17.54 lakh crore in notes in circulation as on October 28 before the demonetisation was announced.
On its part, the finance ministry has said that it respects the independence and autonomy of the RBI and asserted that consultations between the government and the RBI are undertaken on various matters of public importance, and these are either mandated by law or evolved as a practice and “such consultations should not be taken as infringement of the RBI’s autonomy.” But the point is when a joint secretary of the finance ministry goes to the RBI to coordinate operations, there is no way interference can be denied.
In fact, whichever way the government may try to cover up, the demonetisation exercise has only succeeded in damaging the RBI’s reputation for independence and autonomy. The low profile persona of the RBI governor Urijit Patel has added to the perception that the institution is willing to play second fiddle to the finance ministry. In the initial days of demonetisation the public face of the decision was a finance ministry official and not a functionary of the RBI. This furthered the impression of interference.
Going forward, if the RBI asserts itself in monetary policy matters and operational decisions like restrictions on the withdrawals of cash from banks, then it can probably retrieve some of the lost ground in the matter of functional independence. Besides, now that the government has several policy options including the forthcoming general budget it does not really have to depend on the RBI to manage the situation.
The RBI should also now come out with credible data on the post-demonetisation money that has come into the banking system and the manner in which it intends to use this huge influx of cash. Even if some of the facts do not favour the optics of the government, the RBI has a responsibility to go public with such information.
Before I conclude…
To say that I am appalled at the way some BJP functionaries have made comments about Mahatma Gandhi is to make a genuine understatement. How can they dare to make such observations? Similarly, it is shocking to see some international companies being totally insensitive to India’s national icons. Freedom or creativity like a dance rap based on a sacred religious hymn can be offensive. Freedom can be absolute, but with a caveat that it ends where my nose begins.