Unsolved Mystery of Notebandi

Raman Swamy

For four years, from 2012 to 2016, India was growing at a steady pace. It had managed to get back on the trajectory of growth after the 2008 global financial crisis and was just regaining momentum when the economy was hit by two body blows struck by the Narendra Modi government - Demonetization and GST.   

Of these two shocks, one was unnecessary and irrational and the other was a matter of bad timing for forcibly implementing a good tax reform. Coming in quick succession, both these body blows acted like “headwinds” that slowed the growth rate down considerably – to below seven percent which is not enough to meet the country’s needs.

This, in a nutshell, is the assessment of the impact of notebandi and GST by former Reserve Bank Governor Raghuram Rajan, who served as the central bank chief during the last few years of the Manmohan Singh government and the first two years of the Modi administration. 

Rajan has given a few media interviews in the recent past and has also written about some major economic developments and trends - his attempt has been to present a non-partisan diagnosis and his suggestions have been aimed at offering impartial prescriptions and clear-headed solutions on how to get out of the mess rather than pointing fingers or sounding pessimistic. 

On Friday he delivered a speech at the California University on the theme of the ‘Future of India’ in which his focus was once again on practical remedies for an economy which he believes had been put on a sound foundation for fast growth ever since the game-changing reforms of the Narasimha Rao era, the liberal pro-corporate vision under Vajpayee rule and the blending of far-reaching welfare programmes with continued liberalization policies during UPA-1. 

The global financial crisis in 2008-09 did cause the Indian economy to stumble; but targeted stimulus packages and timely pain-killers by the economist-prime minister made it possible for India to avoid falling like many other countries and to relatively rapidly get back into stride within a few years. 

The actual recovery process began in 2012 but visible signs of an upturn manifested themselves only after a couple of years. By that time, the country had witnessed a tumultuous election and a new government was elected to power, blessed with the benefits of having an economy on the mend from the very beginning.  

Unfortunately, and quite inexplicably, that advantage was frittered away in November 2016 by ordering a total blood transfusion - replacing existing high value currency with newly printed notes. 

Many economists, critics and even common citizens have pointed out the illogic of the entire transfusion exercise in which 500 rupee notes were replaced by new notes of the same denomination but the old 1000 rupee notes were scrapped and replaced with higher denomination 2000 rupee notes.  

It remains a puzzle to this day about why this was done – although there were some astute minds even two years ago who sensed it was a method of making it easier for curremcy-hoarders, black-marketers and black-money-operators to transport, store and exchange large volumes of cash more efficiently and cost-effectively.

That aspect of Narendra Modi’s notebandi bombshell is just one of the many mysteries of the Demonetization operation which still remain unsolved on the second anniversary of what Opposition parties have called the “black day” of November 8, 2016.  

None of the original officially-stated objectives of the massive currency switch have been fulfilled and this is indisputably even though Finance Minister Arun Jaitley has attempted to conjure up a few feeble figures to claim that the number of registered tax-payers has increased – without making any mention of the fact that the actual quantum of income-tax revenues have not shown any magical rise, which would have happened if the shock of a demonetization had really instilled fear in the hearts of millions of tax evaders, avoiders and defaulters. 

Another oft-repeated claim by the government and by the Prime Minister himself is that notebandi was aimed at transforming India into a cashless economy.  RBI statistics and Jaitley’s own figures reveal the absurdity of that contention - India still remains very much a cash-transaction economy and even the nominal rise in digital transactions is not striking enough to attribute to the November 2016 bombshell. 

Rather, the country has been gradually going electronic for more than a decade ever since online banking and credit and debit cards were introduced and in any case number of digital transactions would have grown in the normal course. Indeed, GST being rammed down the throats of the business community, down to the smallest mom-and-pop shops,  has forced more people to computerize their accounts and digitalize their big payments than notebandi did.  

Even the increase in use of ATMs was under compulsion during the initial 50 harrowing days after November 8 when citizens were denied the right to withdraw their own money from their own savings bank accounts and had no alternative but to swallow the humiliation and endure the hardship of standing in serpentine lines for hours on end in front of cash dispensing machines to be able to get a maximum of Rs 2000. 

It is noteworthy that in spite of the fact that in the subsequent months the number of banknotes that can be withdrawn in a day continues to be ridiculously rationed, cash remains king in the majority of transactions in ordinary retail trade, public transport networks and daily payments and wages. 

The truth is that demonetization was both a failure and a disaster in terms of the stated objectives. The billion-dollar question is whether it achieved certain hidden and invisible goals that were never made public. Only a deep-excavation investigation into the real motives behind why Narendra Modi announced his draconian measure at 8 p.m. on that fateful day can reveal the true story. 

There can be no doubt that while the entire population of India was starved of cash during those nightmarish weeks and months, huge caches of newly-printed banknotes were found in the possession of several wealthy businessmen and traders.   News reports of raids being conducted and cartons, sacks and even godowns full of mint-fresh 2000 denomination bundles of cash being found, were not uncommon in late 2016 and early 2017. Photographs and TV camera footage testified to the veracity of such shocking discoveries.

The strangest aspect of the mysterious volumes of cash being found is that none of those stories have been followed up by the authorities or the media. None of the questions that cried out loud to be asked were ever seriously asked or investigated.  

A partial and feeble explanation given at that time was that perhaps corrupt bank managers might have secretly handed over the new currency to favoured customers.  But the bank branch back door theory can at best be an unconvincing part-answer - physically taking out huge quantities of banknotes from bank vaults under cover of darkness could not have been possible for individual bank managers. 

Too many staff members and security guards would have been privy to the goings-on.   Consignments of cash delivered to the branch and deposited in its safe lockers would have been accounted for in the records and receipts. There would have been multiple persons involved and numerous receipts and other documents. 

In other words, the back-door theory does not hold much water, except for small amounts of limited handouts. Moreover, by now, two years down the line,  all such errant bank managers would have been exposed and charged with serious crimes by now.  

That has not happened. It indicates that the bundles of newly minted cash was diverted to other destinations instead of being delivered to the cash-starved bank branches.   This could only happen with the involvement of key persons in the State Bank treasuries and those entrusted with transporting consignments of newly printed banknotes in security vehicles.  Thereby hangs a story.

Nov 13, 2018

Raman Swamy [email protected]

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