The truth behind demonetization

The truth is out at last. It was not the Reserve Bank of India which proposed demonetization and the Centre merely agreed to it. It was the other way round. It was the Centre which was dead set on demonetization and rammed its decision down the throat of the RBI. Despite the careful language in which it is couched, the seven-page reply sent by the central bank of the country to the Parliament’s Standing Committee on Finance makes that clear. In fact the Government was secretly and silently preparing for demonetization for full six months. It was not a sudden  apocalyptic vision that the Prime Minister had in the evening of November 8 last year that inspired him to announce that momentous decision.

The RBI letter clearly says: “The (RBI) Board noted that a summary measure in the form of withdrawal of legal tender character of the high denomination bank notes . . . is proposed by the Government.” So this ‘summary measure’ was proposed by the Government and the RBI was asked to approve it formally. Which it dutifully did.  Apart from the intrinsic merit or demerit of the decision, what is disturbing is that the autonomy of as important a body as the RBI was violated with impunity by the Government and the RBI was left to justify it on its own and face the music as best as it could. Even now, the RBI is willing to disclose the number and amount of high-value notes that have been demonetized and how many of these notes have been deposited in the banks and post offices, but it is the Government which has set its foot firmly down on it.

The tendency of the present Government is to bring every institution – autonomous, semi-autonomous or government-aided – under its full administrative and political control. At one level there is the attack on federalism by encroaching into the areas which are constitutionally the domain of the States. At another level there is the tendency to dilute the authority of autonomous bodies like the RBI. The Prime Minister and the Finance Minister should have come forward and owned full responsibility for the demonetization decision. Instead, they are trying to pass the buck to the RBI which had no alternative to dittoing the official line. The real effect of demonetization on the national economy would be clear in the days and months to come. Till then, the government will take the credit for the demonetization decision and the RBI will be held responsible whenever anything is found to have gone wrong. 

Friday, 13 January, 2017