Excerpt from Note-bandi by R Ramakumar
On the first anniversary of demonetisation, this excerpt from the introductory chapter to a new book asks pertinent questions while providing a fearsome flashbackbooks Updated: Nov 08, 2017 19:17 IST
A Nation in the Queue; On How Demonetisation Wrecked the Economy and Livelihoods in India
Nothing, in any recent period, has captured public discourse in India more intensely as Prime Minister Narendra Modi’s announcement of demonetisation. The step, literally, touched every pocket and wallet in India. For weeks after 8 November 2016, no news coverage was complete without the mention of an impact of demonetisation. No discussion between friends or relatives was devoid of a sharp exchange of views on whether demonetisation was good or bad. No visit to a market or a restaurant was divorced from a thought on whether one had enough cash in hand. No visit to a bank or an automated teller machine (atm) was planned without an assessment of the time to be spent in the queue. Indeed, the image of the queue was not just a metaphor for what demonetisation had left behind, but also an experiential takeaway for every citizen.
This book is about India’s disastrous demonetisation experiment in 2016…
This… is not just a book on demonetisation, but one that places questions on demonetisation within the broader debates on black money and tax evasion in India over the last six decades.
I: Demonetisation: Announcement and Implementation
For a traveler from what will soon be Donald Trump’s America, the most striking part of notebandi, however, involves its political aesthetics. On Friday, when Trump is inaugurated as President, he will join Modi as the latest figure in the world’s swelling ranks of populist-nationalist leaders, a gallery of strongmen in countries rich and poor, some more democratic and some less so, who govern partly through intimidation and a certain curated arbitrariness, a methodology of deliberate surprise. (Coll 2017)
At 8pm on 8 November 2016, when most Indian families were preparing for dinner, Prime Minister Narendra Modi came on television to deliver an address to the nation. It has not yet been officially confirmed if the address was live or pre-recorded. However, the contents of the address had all the elements of a self-styled shock-and-awe strategy. The address began by appealing to the national pride of the sava sau karod deshwasi (the 125 crore Indians), a phrase that Modi has used freely in political rallies to great effect. According to him, India had become a ‘bright spot’ in the global economy under his leadership. His government, over two-and-half years of rule, had made rapid strides in reducing poverty and ensuring that the fruits of development reached all citizens. However, his efforts to reduce poverty were being weakened by ‘the spectre of corruption and black money.’ He stated that ‘corruption, black money and terrorism are festering sores, holding us back in the race towards development.’ And then came the announcement:
To break the grip of corruption and black money, we have decided that the Rs 500 and Rs 1,000 currency notes presently in use will no longer be legal tender from midnight tonight, that is, 8 November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The 500 and 1,000 rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. (PMO, 2016a)
With some exceptions, the Rs 500 and Rs 1,000 notes had to be exchanged at bank counters for either the existing notes of denominations Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2 and Rs 1 or coins of Rs 10, Rs 5, Rs 2 and Rs 1. The exchange was to begin on 10 November; banks were to remain closed on the next day. The old notes (termed ‘specified bank notes’ or sbns) could be exchanged till 30 December. For those not able to return the sbns till 30 December, an extended window of time till 31 March 2017 was promised subject to the submission of a declaration form.
In the same address, the Prime Minister also announced that new notes of Rs 500 and Rs 2,000 were being introduced by the Reserve Bank of India (RBI). Given that the supply of these new notes was in short supply, there were to be restrictions on cash withdrawal from banks and from the atms. For exchange from bank branches, the per day withdrawal limit was set at Rs 4,000 till 24 November 2016. For withdrawals from atms, the per day withdrawal limit was set at Rs 2,000, which was later raised to Rs 4,000.
It was an address to the nation laced with an invocation to the glory of nationalism. To ensure the great march of the ‘nation,’ the country had to be ‘cleansed.’ The people of the nation had to make a ‘contribution’ to this march of the nation by ignoring ‘temporary hardships’ and being ready to make ‘grand sacrifices.’ The address ended with a call to the sava sau karod deshwasi to join the ‘festival of integrity and credibility’ and a cry of Bharat Mata Ki Jai (Hail Mother India).
Public reaction to the address was mixed. A large section was actually appreciative of the announcement, which purportedly aimed to eliminate black money and corruption, which were persistent and everyday problems faced by millions of Indians. A common refrain among this section was that finally, after years of passivity, a decisive measure was being undertaken by the government. The invocation of nationalism and terrorism in the address also appeared to have tilted the balance of public opinion. Another section of the public, among them Left activists, trade-unionists, liberals as well as economists of varying hues, pointed to the flaws of the strategy and expressed doubts on whether demonetisation can effectively address the problems of black money, corruption and terror.
The Role of the RBI
Soon after the Prime Minister’s address, Urjit Patel, the governor of the RBI, and Shaktikanta Das, the then economic affairs secretary, addressed a joint press conference in New Delhi. As per the Reserve Bank of India Act of 1934, ‘any series of bank notes of any denomination shall cease to be legal tender’ only ‘on recommendation of the central board’ of directors of the RBI. Logically, journalists raised questions on the RBI’s role in the design and implementation of the initiative. But Das was evasive and stated that there was ‘no need to go into the process which led to this decision.’
A few days after the announcement, Piyush Goyal, the union power minister, stated in Parliament that the decision to withdraw the legal tender status of sbns was not of the government, but of the RBI. What Goyal did not reveal was that the government had made a request to the RBI to consider such a recommendation. Patel himself admitted to a parliamentary standing committee in January 2017 that the government and the RBI were in talks regarding demonetisation from January 2016 itself. According to his written response to the committee:
It occurred to Government of India and the Reserve Bank that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetising the banknotes in high denominations of Rs 500 and Rs 1,000 or by withdrawing legal tender status of such banknotes…Though no firm decision was taken initially, whether to demonetise or not, preparations still went on for introduction of new series notes, as that was needed in any case.
But the RBI was always well-known for its scepticism towards demonetisation. According to KC Chakrabarty, a former deputy governor of the RBI, whenever the RBI’s opinion was sought on demonetisation in the past, it had advised in the negative. Raghuram Rajan, Patel’s predecessor, had also publicly offered views against demonetisation. In September 2017, Rajan revealed that the RBI under his governorship had warned the government of the ‘costs’ of demonetisation as well as ‘alternatives’ that could achieve the same aims. In clear terms, he signaled that the government had overruled his recommendation:
I was asked by the government in February 2016 for my views on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals. I made these views known in no uncertain terms. I was then asked to prepare a note, which the RBI put together and handed to the government. It outlined the potential costs and benefits of demonetisation, as well as alternatives that could achieve similar aims. If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed, and the time that preparation would take. The RBI flagged what would happen if preparation was inadequate. (Rajan, 2017, p. 10)
Nevertheless, as documents show, on 7 November, the Modi government officially advised the RBI to consider the withdrawal of legal tender status of sbns. According to Patel’s written response to the standing committee:
Government, on 7 November, 2016, advised the Reserve Bank that to mitigate the triple problems of counterfeiting, terrorist financing and black money, the central board of the Reserve Bank may consider withdrawal of the legal tender status of the notes in high-denominations of Rs 500 and Rs 1,000 … It was advised in that letter that cash has been a facilitator of black money … [and the] elimination of black money will eliminate the long shadow of the ghost economy and will be positive for India’s growth outlook. They also observed that in the last five years, there has been an increase in circulation of Rs 500 and Rs 1,000 notes with an increasing incidence of counterfeiting of these notes … There have been widespread reports of the usage of fake Indian currency notes (ficn) for financing of terrorism and drug financing. The ficn have their origin in [a] neighbouring country and pose a grievous threat to the security and integrity of the country. Hence, the government has recommended that the withdrawal of the legal tender character of these notes is apposite. The Government of India advised the Bank to place these matters of immediacy before the Directors of the Central Board of the Reserve Bank of India for consideration …
Accordingly, on 8 November 2016, an emergency meeting of the RBI’s central board of directors was called in New Delhi. The meeting, which began at around 5.30pm, recommended to the government that the legal tender status of Rs 500 and Rs 1,000 notes be withdrawn. This recommendation was sent to the government immediately. A cabinet meeting that had already begun was informed of the RBI’s recommendation. The cabinet approved the recommendation and the Prime Minister’s address to the nation was telecast at 8pm.
The chronology of events show that the government had actively sought the RBI’s recommendation on demonetisation and the RBI’s central board had obliged. The board also did not spend adequate time discussing the merits of the government’s proposal, or the level of preparedness of the banking system. To begin with, Rajan has revealed that ‘at no point during my term [which ended in early-September 2016] was the RBI asked to make a decision on demonetisation’ (see Rajan 2017:10). Responses to rti (right to information) queries have further showed that the board had not discussed proposals for demonetisation at any of its meetings before 8 November 2016. Instead, the recommendation appears to have been hurriedly forwarded to the government. Since then, the RBI has also staunchly refused to share the minutes of the board meeting in response to multiple rti queries.
How much currency was in circulation in the denominations of Rs 500 and Rs 1,000 on 8 November? For many weeks, neither the government nor the RBI provided any information in this regard. The annual reports of the RBI provide information on bank notes in circulation in the chapter titled ‘Currency Management’. According to the Annual Report 2015–16 of the RBI, as on end–March 2016, the total bank notes in circulation amounted to Rs 16.42 lakh crore. Within these, notes of denomination Rs 500 and Rs 1,000 constituted Rs 14.2 lakh crore, or 86.4 per cent of the total value of bank notes in circulation. It was thus assumed that the government had withdrawn 86.4 per cent of the total currency from circulation on 8th November 2016. However, it was later revealed that more notes of Rs 500 and Rs 1,000 were printed and circulated between March 2016 and November 2016. According to RBI (2017a), the total value of sbns in circulation as on 8 November 2016 was actually Rs 15.4 lakh crore, which constituted 86.9 per cent of the bank notes in circulation.
The morning of 9 November opened with screaming newspaper headlines, such as ‘The Great Cash Clean-up’; ‘Cash Wash’; ‘The Black Buck Stops Here’; ‘Surgical Strike on Terrorism’; ‘Surgical Strike on Black Money’; ‘Modi’s Attack on Money Pollution’; and ‘Black Money in the Gutter’. Editorials called the step ‘bold’ and ‘stunning.’ While such one-sided press coverage helped tilt the public mood in favour of the announcement, few could guess what was in store for the next day.
The Mayhem at Banks and ATMs
The enormity of the step—i.e., the withdrawal of 87 per cent of the currency in circulation—had not quite sunk in even on 9 November. India is a heavily cash-intensive economy. As some estimates indicate, about 78 per cent of all consumer payments in India are in cash (MoF 2016). The persistence of agriculture as a major economic activity in the rural areas, a large informal sector in the rural and urban areas (where traders fall back on cash balances to meet their needs of working capital) and the poor penetration of banking infrastructure are some of the reasons why cash transactions continue to be predominant. Cultural factors too play a major role in the preference for cash payments rather than cashless payments. In such an economy, a sudden withdrawal of 87 per cent of the currency was certain to not just cripple regular economic transactions but also create a great rush for fresh cash in the notes of new denominations.
Not surprisingly, the morning of 10 November witnessed mayhem across the country. There was chaos and long queues in front of every bank branch and atm. About 10 crore exchange transactions were reported across the country on that single day. Bank branches ran out of cash in a few hours, and shut their doors. Atms were also closed as they ran out of cash. The lack of preparedness was everywhere to be seen. There simply weren’t enough notes!
The RBI and the government did not anticipate such chaos. On 11 November, the RBI released a press note that stated: ‘There is enough cash available with banks.’ However, the same day, Arundhati Bhattacharya, chairperson of the State Bank of India (SBI), appeared to disagree; she said that it would take at least 10 days for atm operations to return to normal (as events progressed, this proved to be a huge underestimate).
On 12 November, the RBI released another statement, which blamed the people for crowding the banks; it said: ‘as there is ample time, people need not rush to exchange putting avoidable strain on the banking branch network.’ The RBI also urged people ‘to switch over to alternative modes of payment, such as pre-paid cards, RuPay/credit/debit cards, mobile banking, Internet banking,’ which would ‘alleviate the pressure on the physical currency and also enhance the experience of living in the digital world.’ On 13 November, the RBI modified its 11 November statement to state that there was ‘enough cash in small denominations … available at the Reserve Bank and banks’ (emphasis added).
Urging people to shift to digital payments was a clear afterthought. The claims of attacking counterfeit currency, terror financing and black money had fallen apart in just a few days after 8 November. An alternative narrative was necessary to maintain the momentum and induce some logic into the demonetisation policy. Thus, it was argued that demonetisation would help transform India into a ‘cashless’ economy, or at least a ‘less-cash’ economy. A number of incentives to use digital payment systems, albeit insignificant, were announced by the government and the RBI over the following weeks (see RBI 2017, for summary).
There were two major reasons for the chaos at banks after 10 November. First, as on 8 November, the total stock of notes of Rs 2,000, with the RBI and different currency chests, was only 473.3 million pieces, worth Rs 94,660 crore (or, just about 6 per cent of the total value of sbns withdrawn from legal tender status). In other words, the RBI’s central board of directors had not checked its own stock of notes before hurriedly agreeing to the government’s proposal on 8 November. Second, the RBI had printed the new notes of denomination Rs 2,000 in a new size and design. Normally, each atm contained four cassettes; two of them held notes of denomination Rs 500 and the other two held notes of denomination Rs 1,000 and Rs 100. The new note of 2,000 would not fit into any of these four cassettes. As a result, each one of the 2.2 lakh atms in India had to be ‘re-configured’ or ‘re-calibrated’ so that the atms could accurately count and dispense the new notes. The RBI officially admitted to this problem only on 14 November. It stated that re-calibration was a massive and complex exercise necessitating coordination among multiple agencies: banks, atm manufacturers, the National Payment Corporation of India (NPCI) and switch operators. Engineers had to personally visit each atm and spend 2–4 hours per atm to complete the re-calibration. Arun Jaitley, the finance minister, justified the delay in re-calibration; he said: ‘Secrecy could not have been maintained if we had re-calibrated the atms earlier.’
As the atms were not calibrated to store the new notes, banks began to pack all cassettes in the atms with notes of Rs 100. When banks approached the RBI for more notes of denomination Rs 100, the RBI ended up giving them soiled notes that the banks had earlier returned to the RBI. Use of soiled notes led to the frequent jamming of atms, which only added to the chaos. According to Thomas Franco, senior vice-president of the All India Bank Officers Confederation (AIBOC):
Recalibration started only a week after Modi’s announcement … Most atms can accommodate currency worth Rs 2.1 lakh if they are dispensing only Rs 100 notes. This means that an atm can cater to only 105 persons if each draws the maximum allowed value of Rs 2,000 [per day]. But there were at least 300–400 people at most atms.
A major argument of the government in favour of demonetisation was that most illegal transactions and stocks of cash were in notes of higher denomination. Given this logic, it was surprising that the RBI released new notes of denomination Rs 2,000. It turns out that the RBI had actually suggested to the government on 7 October 2014 that new notes of denomination Rs 5,000 and Rs 10,000 be introduced in view of rising inflation and problems of managing currency logistics. However, the government declined this proposal on 18 May 2016 and advised the RBI to introduce new notes of Rs 2,000. No explanation has been provided on how the notes of Rs 2,000 would help reduce hoarding that used to happen in notes of Rs 500 and Rs 1,000. According to the government, notes of Rs 2,000 were released ‘primarily to ensure faster remonetisation.’ However, a week into demonetisation, the fallacy of this reasoning was visible; those who possessed notes of Rs 2,000 were unable to spend it, as no one would offer change or a balance payment over a transaction. In effect, the problem of short supply of notes was exacerbated by the release of Rs 2,000 notes.
The chaos at the banks and atms continued through November and into December. As a study of 214 households in a Mumbai slum showed, the average waiting time at a bank or atm was 1–3 hours for 63 per cent of the households (Krishnan and Siegel 2016). For one-fourth of the households, the waiting time was more than four hours. Sadly, a number of people died while standing in queues. By 18 November, according to news reports, 55 persons, most of them elderly persons, had died. By 31 December, news reports put the total number of deaths owing to demonetisation at 105. All these 105 deaths were not due to long waits at the queue; there were many who embraced death in disappointment…. Varda Balayya, a 42-year-old farmer from Siddipet in Telangana, ‘killed himself and tried to poison his entire family by mixing pesticide in their chicken curry.’ Balayya had wanted to sell his land to pay off debts and organise his daughter’s wedding, but realised that ‘no one would be able to buy his land for a while’ due to the cash crunch. In New Delhi, 25-year-old Virendar Basoya hanged himself to a ceiling fan, as he was reportedly depressed due to his failure to exchange Rs 12 lakh worth of sbns. An infant child died at a hospital in Mumbai after being denied admission and treatment by a doctor who refused to accept payment in old notes of Rs 500. In an interview with Mumbai Mirror, the doctor asked: ‘She could not pay for the treatment with valid currency; so, how could I forcibly admit her?’
Even bank employees were affected by the stress at work; according to bank trade unions, more than 11 bank staff died due to stress at work. To cite an instance, Tukaram Tanpure, a bank peon in Pune, Maharashtra died of a massive heart attack while handling large crowds; working hours at his bank branch had been extended to 12 hours after 10 November.
Narendra Modi, who asked for great sacrifices from the people for the great march of the nation, appeared unaffected by the miseries of people. Speaking to Indian diaspora in Japan, he laughed, made fun of people’s difficulties and quipped: ‘Ghar mein shaadi hai! Paise nahin hai!’ (‘There is a wedding in the house, but there is no money!’). In another speech in Goa, he mocked people waiting in long queues and said: ‘Those involved in scams, now have to stand in a queue to exchange Rs 4,000.’ Leaders of his party — the Bharatiya Janata Party (BJP) —joined in. Manoj Tiwari, the president of the BJP in Delhi was caught on video making fun of people in queues. Tiwari was explaining, shaking with laughter, how he invoked patriotism and escaped from a crowd that was angry over cashless atms:
I went to stand in the [atm] line in my area … I saw that a crowd had started running towards me. In order to defend myself from the crowd, I sang a patriotic song … (and sings …) … ‘The patriots are standing in queues, there is a huge crowd, India’s destiny is getting decorated with hardships … ’
As the article by Atul Sood and Ashapurna Baruah in this volume points out, standing in the queue to withdraw one’s hard-earned money was enlisted as a way to honour the nation. A new ‘moral political project’ was being unleashed, which sought to redefine the relationship between the citizen and the State. Here, every citizen was either ‘a patriot or a criminal’ while the State epitomised virtue and stood above everyone else.
The last date for submitting sbns to the RBI offices was 31 March 2017. It was telling that even on the last day, the police had to be called in to control crowds that had come from long distances. A journalist from New Delhi reported that ‘tears and expletives, scuffles and rants marked the day as crowds occupied half of the Sansad Marg [where the regional office of the RBI is located], slowing down traffic till 4pm.’ Many were turned away citing changed rules that allowed only nonresident Indians (NRIs) to exchange sbns after 30 December. In the line were wives who had discovered that their husbands, who died after 30 December but were critically ill when demonetisation was announced, had kept cash worth Rs 40,000 or Rs 50,000 under their beds. These notes, the hard-earned savings of working people, had turned into pieces of waste paper when they were found by family members. Narain Saini, a 40-year-old hearing-and-speech impaired man, had reached the RBI offi ce with a hand-written letter that said:
Respected governor sir, I humbly submit that I am a physically challenged man. I have Rs 3,000 in old notes which are out of circulation now. Signed, an Indian citizen of yours.
Little did Saini realise that his rights associated with ‘citizenship’ stood seriously circumscribed after 8 November.
On whose door did the blame lie? On the one hand, the government had forced the hands of the RBI to recommend demonetisation without adequate planning or thought. On the other hand, the RBI had allowed itself to be forced by the government, surrendered much of its autonomy and ended up losing much of its credibility and legitimacy. YV Reddy, former governor of the RBI, was rather scathing in his remarks that ‘the institutional identity of the RBI has been damaged.’ Usha Thorat, a former deputy governor of the RBI, was equally harsh:
It is indeed a sad day to see one of the most respected public institutions in India becoming an object of ridicule and scorn. There have been times when the Old Lady of Mint Street was criticised for being too conservative and cautious—for not being able to keep up with innovation and markets—but never has she been accused of not knowing her job. Never has she been the butt of as many jokes as in the last few days.