On Thursday, few hours after former Prime Minister Manmohan Singh called demonetisation a ‘monumental mismanagement’ by the Narendra Modi-government, the government came out with an announcement that yet again proved why Singh, a well-known economist, is indeed right.
The Finance Ministry announced on Thursday (November 24) that beginning midnight, the exchange of old Rs 500, Rs 1,000 currency notes at bank counters will be stopped. People can still deposit these funds into their accounts though, it said.
Late evening Finance Ministry notification stopping the over-the-counter (OTC) exchange of old bills directly contradicts what PM Modi and Reserve Bank of India (RBI) promised the public just a few days back when the RBI said in its statement after demonetisation: The scheme closes on 30th December 2016. The specified banknotes can be exchanged at branches of commercial banks, Regional Rural Banks, Urban Cooperative banks, State Cooperative Banks and RBI till 30th December 2016.
On 8 November, when the PM announced the demonetisation in his televised address, he had said: “From 10th November till 24th November the limit for such exchange will be 4,000 rupees. From 25th November till 30th December, the limit will be increased.”
Now, take a look at the 11 November press release of the Reserve Bank of India (RBI). It said, “The facility for exchanging the withdrawn denominations of ₹500 and ₹1000 is available for nearly 50 days. The Reserve Bank appeals to members of public to be patient and urges them to exchange their old notes at their convenience, any time before December 30, 2016."
In effect, both PM Modi and the RBI assured the public that the facility to exchange the old Rs 500, Rs 1,000 notes will stay till at least 30 December. People do not have to rush to the bank counters to get their notes exchanged. What about those people who waited instead of going to banks immediately like senior citizens, housewives, students and patients, among others, who trusted these assurances from the government and the RBI and did not exchange their old notes? Isn’t it a breach of a gentleman’s agreement?
Here is the inference from this whole mess: By abruptly withdrawing the exchange facility and sharply contradicting the PM’s speech and RBI's statement, the Finance Ministry just proved that there is a serious disconnect and lack of understanding between the finance ministry, the PMO and the RBI on the implementation of the demonetisation process.
Secondly, between the government and the RBI, there is an even more serious disconnect, it appears. The Reserve Bank’s appeal ‘to members of public to be patient’ and the institution’s guidance to them to 'exchange their old notes at their convenience, any time before December 30, 2016’ has been rendered meaningless and ridiculed by the Finance Ministry's decision to abruptly stop the exchange of notes, more than one month before the date promised what RBI has promised. On a subject that predominantly falls in its domain, the central bank will now fight a major trust deficit with the public. Next time, there is an RBI advisory, people may take it with skepticism.
How has the government made a decision or come to the conclusion that every needy person has exchanged old notes for their immediate needs? As per the RBI data, from 10-18 November, of the total Rs 5,44,571 crore received at bank counters, exchange of notes amounted to only Rs 33,006 crore, while deposits constituted the majority of Rs 5,11,565 crore. True, this is also because of the tight limit set for exchange over the counter. But the other reason can be that some people haven't approached their banks yet and are waiting for the rush to get over before 30 December.
It is not clear what prompted the Finance Ministry to prematurely stop the exchange facility at banks. In its notification last evening, the Ministry said, “it has been observed that over the counter exchange of the old currency notes of Rs 500 and Rs 1,000 denomination has shown a declining trend”. But, the counter question here is how the government would know if someone is waiting to exchange his notes within the promised period of 30 December.
“It has further been felt that people may be encouraged and facilitated to deposit their old Rs 500 and Rs 1,000 notes in their bank accounts,” the Ministry release said. Here, if the idea is to encourage people to deposit money and later let them withdraw from branches or ATMs for immediate needs, it could have waited till the time ATMs and bank branches have enough cash supply, especially in rural India, so that those who would want to deposit funds and later withdraw can do so in a hassle-free manner.
But, that’s not the case now for sure.
Though there is a slight improvement in the situation in ATMs (even in metros), people are still standing in queues to withdraw money. Many ATMs are still out of cash and even the most optimistic estimates indicate that it might still take a few months before things will get back to normal. Given this scenario, the question arises on what basis did the government stop the exchange facility abruptly and ask people to deposit funds. Clearly, the decision hasn’t come out of a thorough thought, but more likely it looks like an impulsive action by the bureaucracy of the Finance Ministry.
If the idea is to discourage black money being exchanged at the counter, again the Ministry has got it wrong. The over-the-counter exchange facility was offered to meet the immediate cash needs of the common man with a very small limit of Rs 4,000. It should have continued at least till December-end to make the transition process smooth. Those with unaccounted wealth can still deposit their funds in small deposits in branches. Hence, the entire rationale behind the move makes little sense.
Ever since the demonetisation announcement on 8 November, there has been a series of flip-flops on rules by the government. In the case of exchange, the daily limit was first set at Rs 4,000, then increased to Rs 4,500 and later the limit was reduced to Rs 2,000. Then the government introduced a new method -- of marking people who come to exchange notes with indelible ink. Its latest move is to stop the exchange facility itself one month ahead of the promised time. To top it all, the RBI issued on Friday another statement: The Reserve Bank of India advises members of public that exchange of banknotes in Rs 500 and Rs 1,000 denominations, whose legal tender status has been withdrawn, will continue to be available at the counters of the Reserve Bank upto the current limits per person as hitherto. (However such exchange facility is no longer available at other banks' counters).
Once again, the comment of the former PM and former RBI governor merit a mention. “It is no good that everyday the banking system comes with modification of the rules, the conditions under which the people can withdraw money. That reflects very poorly on the Prime Minister’s office, on the Finance Minister’s office and on the Reserve Bank of India. I am very sorry that the Reserve Bank of India has been exposed to this sort of criticism which I think is fully justified.”
By repeated flip-flops, Modi government is proving Manmohan Singh right.