The government ‘advised’ RBI that demonetisation was a good idea for the Board to consider for a variety of reasons, including dealing with counterfeiting and black money; the Board considered this and approved the proposal—once this was given, the government went ahead and announced the demonetisation.
Given the central bank’s reluctance to come out with information on demonetisation, from the minutes of the Board meeting that cleared it on November 8 last year to even details of how much of the 500-/1,000-rupee notes has come back into the banking system, the Public Accounts Committee’s (PAC) examination of RBI Governor Urjit Patel is to be welcomed—at last, a lot of information that the public have a legitimate right to know may now come into the public domain. Beyond that, however, things get a bit grey. The RBI Board, The Indian Express (IE) has reported, did not make the suggestion to the government; it was the other way around. The government ‘advised’ RBI that demonetisation was a good idea for the Board to consider for a variety of reasons, including dealing with counterfeiting and black money; the Board considered this and approved the proposal—once this was given, the government went ahead and announced the demonetisation. While this shows up the Board as having limited powers—at the time of the decision, it was not even a complete Board—the RBI Act allows the “Central Government …from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”. Sure, the Board could have rejected the idea and waited for ‘directions’, but what if the Board agreed with the government?
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That is why the PAC’s questions for Patel—listed in another IE story—make little sense, other than scoring political points. How is Patel to answer the question “What was the exact rationale laid out by the RBI for this decision to invalidate R500 and R1,000 notes overnight?”, other than to repeat the claim that it will help capture black money stocks held in cash—will the PAC be satisfied with this explanation, already given in detail in a 7-page note? Or take “what gave the powers to the RBI to ration currency notes in the country? If there are no laws that you can cite, why should you not be prosecuted and removed for abuse of power of office?” Once 86% of the currency was removed from circulation—the power to do this is given in Section 26(2) of the RBI Act—what else was RBI to do but impose rationing? Or take the questions on the flip-flops, including the decision to ink fingers of those exchanging their currency notes—“please give us the name of the RBI officer who came up with the idea to ink people for withdrawal”. Many of the flip-flops, it has to be recognised, took place once the government/RBI was alerted to the misuse by those with black money—inking was not a great idea, but few expected so many money mules to be exchanging black money. Since no country in the world has attempted anything like this, there was no playbook to refer to—and, by virtue of the secrecy required, there could only be that much planning for every contingency. None of this is to say the central bank has acquitted itself well—its estimate that the GDP impact of demonetisation will only be 15 bps tells its own story—or that demonetisation was even a good idea, but it does appear the PAC is simply using the RBI chief to aim at the government.