Demonetisation: Why there is no conflict between RBI, govt's versions on note ban

A report in Tuesday's edition of The Indian Express has been interpreted as "proof" that the Reserve Bank of India (RBI) had no idea about demonetisation till 7 November, when the Centre suddenly put a gun to its head and forced the apex bank to comply with its wishes within 24 hours.

Quoting from a note submitted by the RBI to the Parliament's Department Related Committee on Finance headed by Congress leader Veerappa Moily, the newspaper reports that it was the government that had "advised" the RBI to withdraw the Rs 500 and Rs 1000 banknotes and not the other way round, as expressed by Union Power Minister Piyush Goyal during a debate on demonetisation in the Rajya Sabha.

Reserve Bank of India. Reuters representational image

"Government, on 7 November, 2016, advised RBI 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," reads the note put forward by the RBI on 22 December, according to the newspaper.

A day later, the RBI board met to "consider the government's advice", and after "deliberations," decided to recommend to the Centre that the "legal tender status of the banknotes in the high denominations of Rs 500 and Rs 1000 be withdrawn". The government "considered the recommendations" and decided to withdraw the notes, the report said.

Two questions arise: Is the RBI's account of events at odds with the minister's, and was the apex bank completely in the dark about the plan?

There is nothing in the report or the RBI's note to the Parliamentary panel to suggest that the central bank's version runs contrary to what Goyal said on the floor of the House on 16 November when he clarified that the "board of reserve bank took this decision, sent it before the government and with the government endorsing it, Cabinet gave its nod to it to demonetise the old currency notes of Rs 500 and Rs 1000 and bring new notes".

The RBI's note is indicative of a formal communication from the government once the date of currency withdrawal had been finalised. The RBI was accordingly "advised" and asked to give its opinion. Legally and in principle, there's nothing wrong in what the power minister told Parliament and it is unlikely to result in any legal leverage for the Opposition, even though there could be space for a political point. The RBI's and the minister's accounts indicate the last-mile technicalities and bureaucratic due process where "advise" is followed by "considerations", "deliberations" and "recommendations", and the nod was finally given from the right quarters.

There could be valid questions about the autonomy of the RBI and whether the central bank could have held back its consent and embarked on a path of confrontation with the government. That remains a larger point, but it's preposterous to surmise that senior RBI functionaries had no inkling about such a disruptive drive that involves their intense cooperation until the very last minute.

Further into the seven-page note, as accessed by Indian Express, the RBI, under the headers 'Background' and 'Preparations', says that it "occurred to both the government and RBI" that the introduction of new series of currency notes and withdrawing of the legal status of high value banknotes (Rs 500 and Rs 1,000) could stop the triple menace of counterfeiting, terrorist financing and black money. Crucially, it says that "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".

This is a clear indication that key RBI figureheads were kept in the loop about the impending move.

The sequence of events also appears to corroborate such a suggestion. The RBI's October 2014 recommendation for banknotes worth Rs 5,000 and Rs 10,000 was shot down by the government in favour of Rs 2,000 currency notes in May this year after which the bank went about finalising the design and security essentials. The RBI's printing presses were pressed into service once the government's final approval came in June, which would be in line with Modi's and Finance Minister Arun Jaitley's assertions that RBI had been working on it for six months.

The RBI note also makes it clear that a decision to decide on the withdrawal of legal tender could be made once the stockpile of new currency notes reached a "critical minimum". It appears that the Centre decided to demonetise before such a threshold was reached, but that could be because of the government's apprehension that the secrecy of the operation being compromised. In fact, a few days before the move, images of the new Rs 2,000 notes were leaked online.

In a second report based on an RTI application, Indian Express found that RBI had not discussed the possible withdrawal of Rs 500 and Rs 1,000 notes during any of its board meetings last year (May, July or August), even though the proposal to introduce new Rs 2,000 banknotes was taken. However, the RBI declined to answer the newspaper's RTI-based query on whether former governor Raghuram Rajan had sent any letter or communication to the government against withdrawing Rs 500 notes before his term ended in September 2016.

A 9 January report in The Economic Times, however, claims that six months prior to demonetisation, the Centre had "sent a reference to RBI asking it to approach its central board to consider a proposal to invalidate Rs 500 and Rs 1,000 notes". The report also states that "six months before the initiative, a small group of top officials belonging to the key stakeholders had begun working on the move".

There is enough space between RBI's statements and the sequence of events to suggest that the apex bank's key functionaries were aware of the imminent move. The moot point, however, is over the central bank's independence and whether or not demonetisation indicates an erosion of RBI's autonomy. There is scope for an argument that it was not in a position to deny consent even though a handful of higher officials were part of the decision-making process. Central bank's autonomy isn't an India-specific debate. Bernie Sanders, the US Presidential candidate who lost to his Democrat peer Hillary Clinton, had in a 2015 column in The New York Times advocated "reforming the US Federal Reserve" to fix the economy.

There are no easy, one-word answers. While institutional independence is a necessary ingredient for a robust democracy, there is also the need to introduce accountability in their actions. A government at loggerheads with central bank over policies serves no one's purpose. At the end of the day, it is the government that must face the people for a final audit of its performance.

TT Ram Mohan, professor at IIM Ahmedabad, has written in his blog on the subject: "The danger, in the Indian context, is that autonomous institutions (such as the RBI, IITs, IIMs,DRDO, BARC and others) exercise autonomy without due regard for accountability. The beauty of the Parliamentary system is that there is, in the ultimate analysis, accountability to the people for outcomes. We need to formalise mechanisms of accountability for all autonomous institutions."