Loss of Reputation

The 50 days since the Prime Minister’s 8 November announcement have shown that every attempt is being made to gloss over the fallout of the severe shortage of currency—shrinking economic activity and loss of livelihoods—while hard-selling the stated objectives of fighting “black money,” counterfeit currency, terrorism, and the subsequently added push for a “cashless society.” The Narendra Modi government hopes to gain politically from “demonetisation.” However, in the process it has not only put the country’s economy at considerable risk but has also undermined the reputation of the Reserve Bank of India (RBI).

These 50 days have shown that the apex monetary authority can be made to bend backwards to favour the political dispensation of the ruling regime. This is arguably the most malleable the RBI has been to the will of the Ministry of Finance in a long time. Indeed, the choice to cancel legal tender of such a large proportion of currency without proper preparation, and with such secrecy is but a symptom of this changed relationship between the government and the central bank that is being enforced by the Modi government.

Right from the RBI central board’s decision to go along with the government and cancel legal tender of high denomination notes to the 60-plus notifications issued since then, the top brass of the apex monetary authority has inspired less confidence with each passing day. The RBI is wholly owned by the government, and is supposed to have a diverse central board (and regional boards) comprising not only economists and bankers, but persons involved in public policy and civil society. The Modi government has allowed positions on the boards to remain vacant. Over the past three years, the boards of the RBI have been shrinking. The central board that “recommended” cancelling the legal tender status of high denomination notes on 8 November had only four independent members when there should have been 14, and had six executive members when there should have been seven.

The RBI’s refusal to disclose the minutes of the central board meeting that “recommended” cancelling the legal tender of high denomination notes is perplexing. The right to information application for these minutes was turned down. Certainly, there is no need for secrecy now after the unprecedented decision has been taken! The RBI and its governor have done little to address pressing questions that institutions in a democratic country are obliged to answer. Why is the shortage of currency notes more acute in some regions? How is the distribution of new notes being prioritised? Why is the RBI refusing to disclose the reasons for demonetisation?

As things stand at the end of the calendar year, nearly all the old ₹500 and ₹1,000 notes have returned to the banking system and less than half of what is required for a functional economy has been issued as new notes in circulation. The printing of new notes has not kept pace with the requirement, which should have been anticipated, given India’s note-printing capacity. The government seems to now even be contemplating printing currency abroad, again something it should have planned much earlier. It could take many more months before a semblance of normalcy is restored as far as availability of cash is concerned.

The consequences of the acute shortage of currency in a cash-based economy such as India’s have meant fewer transactions in general. Economic forecasts by private research agencies point out that the short-term consequences of the shortage of cash are causing a shrinkage of economic activity. If these forecasts are anything to go by, the second half of 2016–17 will see a sharp reduction in gross domestic product growth as well. News reports suggest that prices in agricultural markets have fallen. The reasons for these fluctuations are not seasonal, but indicative of a shortage of demand. With severely limited cash, firms in the informal sector are finding it hard to continue functioning. Those employed in the sector have also suffered, with many migrants being forced to return to their villages. Government spokespersons are putting up a brave front claiming that higher tax collections are an indication that the situation is not as bad as is being made out. They also claim that lack of widespread unrest is an indication of popular support for demonetisation.

Nevertheless, the government and the RBI owe citizens a much greater degree of transparency and accountability. It is not for no reason that banking unions are unhappy with the RBI, and even former senior employees of the central bank of the rank of deputy governor are saddened by the poor planning and implementation that has adversely impacted the lives and livelihoods of most Indians. The government is purposefully undermining democratic structures and processes in the name of an unexplainable warlike discourse around issues relating to demonetisation. This is perhaps not unexpected from a government that has gone out of its way to change established democratic institutions in ways that suit its narrow political ends.