But don’t forget demonetisation

Lest we forgive or forget, a reminder of the aftermath of that indefensible masterstroke of the Narendra Modi government

Protesters against demonetisation set fire to mock-ups of high-denomination currency, featuring Prime Minister Narendra Modi in place of Mahatma Gandhi, during a demonstration in Lucknow in 2016 (photo: Deepak Gupta/Hindustan Times via Getty Images)
Protesters against demonetisation set fire to mock-ups of high-denomination currency, featuring Prime Minister Narendra Modi in place of Mahatma Gandhi, during a demonstration in Lucknow in 2016 (photo: Deepak Gupta/Hindustan Times via Getty Images)

Aakar Patel

Demonetisation’s anniversary came and went, without any defence of the masterstroke from the Indian government.

Notebandi was the idea of a man with a diploma in mechanical engineering from Latur, a town in Maharashtra. Anil Bokil runs an institution called ArthaKranti (‘economic revolution’, literally) and describes himself as an economic theorist.

His thinking was: In a country like India, where 70 per cent of the population survives on just Rs 150 per day, why do we need currency notes of more than Rs 100?

He revealed in an interview, days after Narendra Modi abolished 86 per cent of India’s currency, how the prime minister had got the idea. In July 2013, soon after Modi was declared the BJP’s prime ministerial candidate, Bokil went to Ahmedabad with his colleagues and sought to make a presentation about an ArthaKranti proposal.

Modi gave Bokil 10 minutes. “By the time I was done, I realised that he had listened to me for 90 minutes. He said nothing after I had made my presentation,” Bokil said.

This is not surprising. The idea of owning such a simple, magical and transformational action would have transfixed Modi.

The ArthaKranti website (currently defunct at the time of publishing) listed the ‘benefits of demonetisation’ that were conveyed to Modi at that meeting, including:

  • ‘Terrorist and anti-national activities would be controlled’

  • ‘the motive for tax avoidance would be reduced’

  • ‘corruption would be minimised’

  • and there would be a ‘significant growth in employment’.

What’s not to like?

But there are no details about any of this, no measurements or facts to back up the claim, no explanation of <how exactly> demonetisation would be executed and its benefits achieved. There is no reference to or analysis of what the fallout could be either.

ArthaKranti also proposed withdrawing the entire taxation system in favour of a transaction tax, accompanied by a Rs 2,000 limit on cash transactions. (This too has gained currency, so to speak, with the government.) Its ideas were reductive, simplistic and, apparently, easy to implement.

It was perfect for Modi, who picked out the single most dramatic element from this—demonetisation—and pushed it through.

In his speech announcing it on 8 November 2016, Modi said the problems of India were corruption, black money and terrorism. That strong steps would need to be taken against these, and he would be the one to take them. Indians were honest, the prime minister said, and yet India was corrupt — and so a powerful and decisive step was needed against corruption, black money and terrorism.

Had people ever thought about where the money for terrorism came from, 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 and 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 would mean that ‘such notes currently in the hands of antinational people would become worthless’. Modi acknowledged that there would be some <discomfort> through this policy, but it would not be a <problem>. This was because, he said, ordinary citizens were enthusiastic towards sacrifice and hardship for the country.

The government’s various departments, meanwhile, had made no special preparations for the prime minister’s new pet project either. None were deemed necessary, because indeed, such preparations would be detrimental to the element of ‘surprise’ necessary to upturn the ‘anti-national’ applecart.

We know this because the Cabinet was summoned only on 8 November itself, and ministers were told to leave their mobile phones behind so the act could remain a secret till it was announced at the meeting. Since the ministers didn’t know, their departments didn’t know. Nobody prepared, just as was the case with the national lockdown of 2020.

Modi had been specifically warned by the RBI—the body that actually had to demonetise the notes of currency that its governor had guaranteed with his signature—that demonetisation was a mistake. Yet, notwithstanding, the prime minister went ahead with his ‘brainwave’. The RBI was now arm-twisted into delegitimising its own promissory note!

Raghuram Rajan resigned as governor after having discussed and disapproved of this move.

The new governor, Urjit Patel, was forced to accept it by Modi within weeks of taking office. He then refused to release the minutes of the meeting that the RBI urgently held on 5:30 p.m. on 8 November (just before 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, Patel quit and left the following month. The RBI minutes said it had been 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 an estimated Rs 400 crore was present in the system.

  • That, therefore, the Rs 500 and Rs 1,000 notes should be made invalid.

The RBI’s response to the government had been:

  • That the economic growth referred to by the government was real, while the rise in currency was nominal and not adjusted for inflation, and that ‘hence this argument does not adequately support the recommendation’ for demonetisation.

  • That most black money was held as land or gold, and not cash, and that abolishing currency denominations would have no effect on curbing black money.

  • That demonetisation would have a negative impact on the GDP.

  • That Rs 400 crore in counterfeit currency was insignificant (only 0.02 per cent) compared to the total cash in circulation, which was Rs 18 lakh crore.

Having said all this, the RBI board nonetheless put its rubber stamp on 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 Modi. That was 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 in fact accurately predicted both the damage and the lack of benefit. What the RBI was hiding was the fact that Modi had ignored its concerns — all of which turned out to be true — and gone ahead anyway.

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