Did Demonetisation Breach the Unique Autonomy India Promised to Sikkim?

During the height of demonetisation drive, Sikkimese people faced a shortage of currency due to the unavailability of new denominations due to RBI restrictions. For the Government of Sikkim, this step constituted a major breach of special provisions and a step towards the “nationalisation” of its most important banking institution with its legacy from the erstwhile Kingdom of Sikkim.

Demonetisation in Sikkim is well worth recording, for its impact on Sikkimese cultural communities and the state’s otherwise largely rural–agrarian economy which differs vastly from the experiences of rest of the country. The impact of demonetisation bears a trajectory of Sikkim’s unique position in the Indian Union after Sikkim’s “absorption” in 1975 as the 22-constituent state with the grant of “autonomy” envisaged under Article 371F of the Indian Constitution.

Although, the rulers of the land, the Chogyals (Dharma Raja) of the Namgyal Dynasty, lost Sikkim as a political entity, but its royal decrees and proclamation command perception of authority and veneration even to this day. Consequently, the autonomy question that Sikkim faces is mediated, incorporated and appropriated by India’s constitutional machination where Sikkim’s law—legal or customary—under the Chogyals, often bracketed as “old laws,” govern’s and regulates Sikkimese cultural communities to this day.

The application of Indian law in Sikkim is, therefore, a subject of verification, in that if such similar laws (in relation to other parts of India) exist in Sikkim’s “old law” clause, so at this juncture “old laws” override national legislations in favour of sound implementation of “old laws” within the territory of Sikkim. In other words, Article 371F of the Indian Constitution permits for the perseverance in force any Sikkimese laws that were in operation prior to Sikkim’s absorption in the Indian Union, unless amended or repealed by a competent authority. 

Sikkim's Fiscal Autonomy

The extent of autonomy that Sikkim enjoys, concurrently, enables the state to maintain the traditions of erstwhile theocratic subjectivities and the subjectivities of a modern nation state. What is of utmost importance in Sikkim’s case is the story of the unique relationship between Sikkim and the centre, highlighting facets of Indian nationhood which are different from the experiences of homogenous European nation states.

The aforementioned aspect of relations between Sikkim and the centre is premised on autonomy (cultural, economical and political) granted to numerous cultural communities within the respective zones of habitation in parts of the north-eastern states of India. One example of such concessions relates to fiscal concessions provided to cultural communities in remote areas of the country. For example, the Government of India has extended Income Tax (IT) exemption facilities to those categories of people who are qualified as “Sikkimese” as per the Sikkim Subject Regulation Act, 1961. This fiscal concession is granted on income generated within the territory of Sikkim and returns from surplus on securities generated elsewhere.

In addition, the State Bank of Sikkim’s (SBS) functional operation, independent of Reserve Bank of India (RBI) regulations, drew political contestations because of its autonomy, including income generated by SBS. It is alleged that the fiscal concessions extended to Sikkimese cultural communities and the fiscal autonomy of SBS together provided a path to turn undisclosed earnings as legitimate. This argument was used by opposition parties which rallied to target the ruling Sikkim Democratic Front (SDF) government. Even more surprising is the audacious story aired by some mainstream Bengali electronic media house based in Kolkata drawing parallels of Sikkim with Switzerland and SBS with Swiss Bank as a haven for black money.

Instead, the SDF government chose to respond by invoking Sikkim’s special provisions under the “old law” clause, thereby projecting imageries truly of Sikkimese “nationalists” and spelling Sikkim’s unique history in the nation state as entirely different from Bengal and other regions in India.

However, in order to comprehend Sikkim’s fiscal autonomy and the shape of states’ financial health, understanding the temperament of banking operations of SBS is extremely important. SBS is a state-owned network of banking systems with several branches in many parts of the state with its headquarters at Gangtok. The bank was established by the Royal Proclamation Order of the Chogyal in 1968 and receives constitutional protection under Article 371-F of the “old law” which upon absorption in the Union in 1975. The banking services and its operations are confined within the territory of Sikkim. Its functions in Sikkim—other than banking services—include the role of treasury to the Government of Sikkim.

SBS is the only banking institution in India which functions independent of RBI regulations. In more recent times, RBI has begun contesting the status of SBS on the hypothesis that financial and operational issues of the SBS do not come under its jurisdiction, RBI as a regulatory authority is apprehensive about the interests of Sikkimese depositors. The RBI has also reiterated that its nomenclature is misleading depositors as it appears like an affiliate of forming loans. In addition, it was highlighted that the Non-Performing Assets (NPAs) used by SBS as a financial institution was high and severe. RBI has quoted that, absence of banking regulations deprives SBS of Deposit Insurance and Credit Guarantee Corporation (DIGCC) cover in case of financial emergencies, etc. It is ironic that an RBI dictum was served after 42 years of SBS’s functional operation independent of the RBI regulations.

This “specious ground” around which RBI sought to destabilise Sikkim’s financial autonomy led to freezing of individual accounts of Sikkimese populace. Despite freezing of SBS accounts, people came forward and deposited old currency notes at nearby SBS branches without any doubts. To add to the confusion, opposition parties in Sikkim rallied a sentiment, a projectile that was a direct threat to SBS autonomy. This is not the first time in India that political parties have engaged in politicising autonomy of financial institution such as that of banking operations. SBS today remains the only bank in India which remains independent of RBI regulations in India. In a similar case, the entry of RBI has substituted the Jammu and Kashmir Bank as the general banking agent for investment in Jammu and Kashmir (J&K). The J&K Bank functioned as the central bank of J&K government often borrowed funds from its treasury during financial crisis. The RBI regulation makes it mandatory for the state government to seek permission and justify reasons for borrowing funds from other sources. The financial autonomy of such a banking system allows a state like Sikkim to approach SBS for overdraft facility in a manner in which the J&K Bank had been providing to J&K government. The overdraft facility of such banking functions is similar to that of fiscal autonomy that Sikkim exclusively enjoy in India. 

SBS releases funds for Government of Sikkim related projects and state government employees draw salaries, pensions and arrears without delay, etc. The interest rates it provides to its depositors are mutually agreed upon by the bank and the state government. During the height of demonetisation drive, Sikkimese people faced a shortage of currency due to the unavailability of new denominations due to RBI restrictions. For the Government of Sikkim, this step constituted a major breach of special provisions and a step towards the “nationalisation” of its most important banking institution with its legacy from the erstwhile Kingdom of Sikkim. The weak public memory of Sikkimese people to echo on such sentimental issues following RBI diktat obliged the Government of Sikkim to evoke institutional memory by reinforcing and reminding the centre of Sikkim’s late and unusual entry as a constituent part in the Indian nation state as its reference point for negotiations.

The Union Minster of Home Affairs, Rajnath Singh sensing trouble in his official communiqué dated 8 December, 2016, directed the Ministry of Finance under Arun Jaitley to oversee successful implementation of demonetisation programme. The communiqué appraised the finance ministry to clear such road blocks that would invite condemnation both for demonetisation programme and GOI under the BJP a bad name in Sikkim. Further, it stressed that Sikkim was a politically sensitive region in India and that its people be allowed to withdraw from SBS as other people had been doing from their respective banks in other parts of the country. The most important aspect of the official communiqué lists that Sikkimese people are in fact a special category of Indian population are at not par with other Indian citizen. 

Importance of the State Bank of Sikkim

One of the many ways in which Sikkim is a special state in India is the fiscal autonomy it enjoys through its banking networks which actually allows it to manage its fiscal cap with limited RBI oversight and without its operational control. An attempt to bring the RBI in the centre stage of fiscal management in Sikkim implies derailment of Sikkim’s autonomy in determining and allotment of permissible ceiling on Ways and Means Advances (WMA) for the state government. It is extremely important to understand the role of RBI in determining the limit on WMA for state governments and screening utility on limits of every day basis in India. So far, the overdraft limit for the Government of Sikkim is mutually decided by SBS and Government of Sikkim without external interference from external agencies. RBI’s attempted inroads into Sikkim’s banking network will shift the power in favour of Government of India. The effort to bring Sikkim into “mainstream” financial regulations was in a way to deprive SBS of the surplus generated from the Government of Sikkim.

Under RBI regulations, the WMA policy maintains that cash balances of state governments have to be invested in treasury bills and dated government securities of Government of India which SBS and Government of Sikkim is not covered. In this, SBS and GOS as shareholders are allowed to keep dividends from its low-cost deposit and not the Government of India. This has so far allowed SBS and the Government of Sikkim to evolve its independent fiscal policy to establish its daily expenditure beyond the WMA limit. It is important to note that state governments are already at the mercy of Ministry of Finance, Government of India for meeting their expected annual expenditure.

The RBI cap on daily expenditure of Government of Sikkim beyond the WMA limit tilts the power balance in favour of the Government of India. The forces of the nation state in Sikkim have been coming in different forms and different magnitudes at different timelines, and the demonetisation bears such a trademark of nation state. Despite this, SBS remains the only bank in India which remains at the centre stage of fiscal relations between the centre and state after the J&K Bank was relegated to a secondary role after RBI’s takeover of managing J&K finances in 2010–11. 

So far, for the Government of Sikkim to have its own state bank as its lender epitomises the state’s financial and fiscal autonomy. It symbolises Sikkim’s quasi-independent position of possessing its own central bank in semblance with Government of India having the RBI as its central bank. The importance of SBS is that it has functioned as a quasi-sovereign financial institution with similar functions of a central bank except printing its own currency for circulation.

The weakened position of the Government of Sikkim at this juncture could have propelled a rupture to Sikkim’s autonomy envisaged under Article 371F of the Indian Constitution. It is a historical fact that political arrangements mandated by the Constitution of India under its special provisions have integrated many communities in the Indian nation state, simultaneously allowing them to govern as per their customary subjectivities. Within this framework, Sikkim has only been an exception within this exception. This postcolonial anomaly is a feature of the Indian nation state; one has to bear in mind that, Sikkim now a constituent part of the Indian Union, in essence, remains a successor state of the erstwhile Kingdom of Sikkim.


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