Nov 8, 2016 – The Day Governor Urjit Patel Should Have Resigned
The minutes of the demonetisation meeting tell us the story of where the independence of the RBI started diminishing.
The minutes of the central board of the Reserve Bank of India’s ill-fated meeting on 8th November 2016 are finally out. We owe a debt of gratitude to Right to Information (RTI) activist Venkatesh Nayak, who published the document in the public domain. Thus ended the final bit of mystery surrounding the ill-advised and disastrous policy adventure of withdrawing the legal tender status of 500 and 1000 rupee currency notes, popularly known as ‘Demonetisation’.
This is the last piece of the puzzle that was more or less complete already, as the disastrous effects of Demonetisation have played out in front of our eyes. Not only was it apparent that those who had black money in hard currency were able to safely retain their wealth, it also seemed that those in proximity to power had prior information of this drastic step. Furthermore, the government was unable to point to even one successful outcome from this exercise in spite of the multiple goals that had been touted out at different points in time. What has been evident though, is the damage Demonetisation inflicted on the informal economy which is a significant driver of overall economic activity in the country.
No matter the subsequent positive but suspect revisions to GDP growth rates, it has been widely recognised that Prime Minister Narendra Modi shoved the most vulnerable of India’s citizens into a doomed existence. Field reportage and surveys conducted by official agencies (National Sample Survey Organisation) and established unofficial sources (such as Centre for Monitoring Indian Economy) have shown just how bad the effects of jobs and livelihoods have been.
Even with this backdrop, these board meeting minutes make for interesting reading. It reveals how those present (presumably with some independence from the Ministry of Finance) were at pains to make the point that as conceived then, Demonetisation offered no benefits, while the downsides were apparent. The objections made ranged from pointing out the confusion and chaos it would cause to long-distance travellers and customers of emergency supplies such as medicines and fuel. They also pointed out logical fallacies in the government’s case such as confounding real and nominal growth rates, the insignificant estimates of counterfeit currency and the negligible proportions of black money that are likely to be held in cash.
In response, not only did the government ignore these protestations, they also assured (falsely, as it turned out) the RBI board that it would make all possible arrangements to ensure that the general public is not inconvenienced. This is a telling moment. The Directors of the RBI can only raise concerns based on their domain knowledge of an event that has no parallel in independent India’s history in terms of its scale and magnitude of impact. When the government claims that they will ensure that adequate steps are taken to avoid inconveniencing the public, should the RBI have taken that at face value? So while the discussions in that board meeting do not provide any strikingly new information about the different risks associated with Demonetisation, it does raise several concerns about how decisions were taken on matters of such critical importance.
The word “inconvenience” actually would turn out to be a gross understatement for what followed. Moreover, the government was unable to take any concrete step that would bring about a systematic reduction in the use of cash by the general public. Irrespective of the merits of going cashless, all data available bears witness that any spikes witnessed were temporary in nature and the use of digital wallets and other such instruments had normalised before long. In short, Demonetisation was a monumental blunder and as former Prime Minister Manmohan Singh had prophetically described, an “organised loot and legalised plunder” of the Indian economy.
Demonetisation was sought to be subsequently justified by political observers, the media, and by BJP supporters on the basis of the political dividends it brought to the ruling BJP. It was pointed out the Prime Minister Modi’s popularity had soared and that his reputation as a crusader against corruption had been boosted by this ‘bold’ move. In fact, Modi’s decisiveness was hailed as a ‘masterstroke’, ignoring his penchant for recklessly inflicting untold hardship on the poorest people in India, who had no option but cash, and exactly those who toiled in long queues to gain access to their own hard-earned money.
The biggest institutional victim of this misadventure was the Reserve Bank of India itself. Left standing to defend this move, with no room to express his concerns or perhaps his dissent, the then-Governor Urjit Patel’s credibility was severely affected by this incident. These minutes don’t really redeem him, but they perhaps tell us the story of where the independence of the Reserve Bank of India started diminishing in the public eye. As the government grossly failed to live up to the assurances it gave its own central bank, Urjit Patel must have felt starkly alone.
November 8, 2016 – that was the day Urjit Patel should have resigned.
Suvojit Chattopadhyay works on issues of public sector governance and development management in South Asia. You can find his blog here. He tweets @suvojitc.