The decision to withdraw notes was taken by the Narendra Modi government and not the Reserve Bank of India (RBI). The banking regulator was taken on board but its suggestions and concerns were mostly ignored.
RBI’s Plan in 2014
As a 10 January report in a section of the press exposed, based on the RBI’s reply to a parliamentary panel, the central bank had drawn up a plan as early as October 2014 to incrementally replace the Rs 1,000 and Rs 500 notes with new notes having fresh designs and innovative security features, which would be difficult, if not impossible, to counterfeit.
This was to be a normal process, especially because currency notes with new designs and security features were long overdue: The last time an overhaul of these two key elements, especially of the two high-value notes in circulation, was undertaken was in 2011.
Once the Modi government settled down at the Centre in May 2014, with the then RBI Governor Raghuram Rajan still firmly in his saddle, it sensed the possibility of turning the exercise into a political masterstroke, perhaps with a view to cripple the BJP’s political opponents ahead of the crucial assembly elections in Uttar Pradesh.
The government couldn’t have been innocent of knowing that demonetisation, with Urjit Patel at the helm, could potentially damage the reputation of the RBI as an institution which is largely independent. And yet it proceeded with its move. The lack of planning could be attributed to the government’s inexplicable hurry to set its demonetisation move in action.
The government forcefully made the case that the high value notes – Rs 500 and Rs 1,000 – formed the vortex of the black money and counterfeiting menace and therefore these should be banished.
However, surprisingly enough, the RBI had suggested in October 2014 to the government that it was in favour of replacing the two notes by even higher denomination Rs 5,000 and Rs 10,000 notes in view of inflation and “managing currency logistics”.
This recommendation was set aside by the government. Curiously enough, while high denomination notes of Rs 500 and 1,000 were presented as villains, the RBI got a go ahead to print Rs 2,000 notes in June 2016 itself.
Low Level of Preparedness
The RBI deemed it fit to replace the two high-value notes to make them counterfeit-free. But the government ordered printing of new Rs 500 and Rs 2,000 notes without even including new security features in them.
As events subsequent to the 8 November diktat have shown, the printing process was not just flawed, it also skipped several vital steps, leaving the pinkish Rs 2,000 and the greenish Rs 500 notes vulnerable to counterfeiting. In other words, the government acted not just against the RBI but has created a situation that will cause immense inconvenience to the people and banks for months and years to come.
Even after some nascent decision was taken to demonetise, the RBI appeared to be circumspect and cautious. It said in its seven-page note to the parliamentary panel that any decision to withdraw the Rs 500 and Rs 1,000 notes could be taken once its currency chests were filled with a “critical minimum” of the new notes.
The unfolding events after 8 November, marked by printing flaws, grossly insufficient cash supply, poor management of state-run banks and dud ATMs, point to highly inadequate preparedness levels, especially when the RBI had warned of dire shortage of the new Rs 2,000 and Rs 500 notes.
What the RBI and the government had sought to keep under wraps was the central bank’s written warning that once demonetisation is announced it might not immediately be possible to replace these notes fully, in terms of both value and volume, within a time frame.
What the RBI hasn’t come clean on – and Patel is not expected to share with either standing committee or the Public Accounts Committee (PAC) any time soon – is the amount of money that has returned to the banks. This suppression of information, needless to say on pressure from the government, is yet another example of loss of autonomy and the damage caused to a relatively independent institution.