DeMo Das” now Reserve Bank of India Governor

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Geopolitical Notes From India

M D Nalapat

Never in human history has a single monetary policy had such an impact on so many individuals as the November 8, 2016 demonetization of Rs 1000 and Rs 500 notes. Prime Minister Narendra Modi personally announced in an 8pm broadcast to a stunned nation that 86% of the currency they held in their hands would become waste paper in four hours time. Senior officials claim that Bill Gates (founder of Microsoft) and an Indian tech billionaire, Nandan Nilekani, were instrumental in persuading senior officials that the demonetization (DeMo) of the currency would in a short time result in the 1.26 billion citizens of the country switching from paper currency to card payments. Interestingly, the credit card companies operating in India as well as non-cash payment systems are overwhelmingly under the control of foreign entities. These were known to have lobbied for the scheme, as also a chartered accountant close to the Prime Minister, S Gurumurthy. After he saw that no senior official opposed the idea, and indeed most were enthusiastic in its support, Modi went ahead with the withdrawal of 86% of the country’s currency in terms of value. In a matter of days, it was clear that the impact of such a move was felt across the economy and in the 90% of homes in India that depended mostly on cash to meet their daily work and other needs.
Those who pushed for DeMo forgot that the formal banking system is non-existent in several parts of India, or that broadband speeds are low even in the big cities. There are numerous villages where not a single internet connection existed. To expect such individuals to overnight acquire the means and methods to do all their financial transactions through the banking system was to place too much confidence in the speed at which change can come in India, a country where 300 million people remain desperately poor even after 71 years of independence from the British yoke.
The measure affected small and cottage industries the most, and cost tens of millions of jobs as well as substantial hardship. This columnist had been certain that Narendra Modi would win for the BJP a second continuous term in office during the 2019 general election, but the day after the move was announced by the Prime Minister, he told a senior official who had worked closely with Modi since he took over as Chief Minister of Gujarat in 2001 that DeMo could result in a defeat for the BJP at the polls by that time. While initially the public were willing to believe that the move, though painful to them, would in less than a year’s time change their economic situation from poverty to wealth, that “Acche Din” ( good days) never came. Indeed, their lives became much more filled with hardship as a consequence of DeMo, a policy which ignored the fact that 94% of the illicit wealth of India is not in currency but in properties or money kept abroad. Indeed, much of the flow of illicit funds was through the banking system, often in the form of over-invoicing of imports and under-invoicing of exports. Plant and machinery, as well as raw material, get imported from abroad at prices far above what they command in the local market, while the value of exports is often much less than the actual price paid by the foreign buyer, the difference being kept abroad
During the 2014 election campaign, Narendra Modi announced that he would ensure that Rs.15 lakhs would be placed in the bank accounts of every citizen. This would be done through getting back the $ 1 trillion of funds that citizens of India are estimated to be keeping in foreign bank accounts not declared to the authorities. There are officials who have managed to educate several children abroad, even though the expenses for each student are much more than the annual salary of the official concerned. While the US insists on knowing exactly how a student will meet the cost of tuition and stay while in the country, agencies in India are wholly incurious about such data.
The most powerful service is the Indian Administrative Service (IAS) followed by the Indian Foreign Service (IFS) and the Indian Police Service (IPS). Each year, a batch gets chosen for each service, and the batch-mates spend several months together in being trained for their posts. The consequence is that batch-mates look out for each other. In case a batch-mate is caught in a scam, many of his fellow batch-mates work hard to ensure that no harm comes to the offender. In other words, that a cover up takes place. As a consequence, very few officials actually get punished in India for corruption, even though graft is widespread. Very little of such pickings are kept in cash for long. Usually, they are sent abroad through hawala channels, or property purchased in the names of family members and others. The demonetization made very little impact on official and political corruption in India. Although there was a fall in such activities for about a year after Modi took office on May 26,2014, soon officials became aware that the Prime Minister had as great a regard for the official machinery as his hero Sardar Patel had while serving as free India’s first Deputy Prime Minister. Officials have been treated more respectfully by Modi than by Prime Minister Rajiv Gandhi or several others. As a consequence, fear of action being taken against them fell, especially because in Modi’s style of functioning, officials are in fact given more importance than ministers.
Modi has ensured that all except a few politicians have zero influence over the official machinery. So with officials looking after other officials, it would be less than accurate to claim that corruption has declined. The files of the Central Bureau of Investigation and the Enforcement Directorate contain several items relating to serving and retired officials against whom no action has been taken.
Shaktikanta Das was a favourite of former Union Finance Minister P Chidambaram and he is almost as close to Chidambaram’s successor, Arun Jaitley. Along with then Revenue Secretary Hasmukh Adhia, then Economic Affairs Secretary Das was the public face of demonetization. Every day the two would give statements about changes in rules and regulations. Some of these changed not only day to day but even within a single day, thereby further confusing the public. At least in private, few claim that the manner in which DeMo was carried out was a success.
It was such a mess that this single measure has had huge political consequences, including an opportunity to the Congress Party to revive. Now that Das has been appointed Governor of the Reserve Bank of India, the nation is hoping that his performance in this role (which is critical to the economy) will be far better than the manner in which he implemented the demonetization at four hours notice of 86% of India’s currency. If not, this appointment to the Reserve Bank of India has the potential to be as big a blow to the economy as DeMo was in 2016.
—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.

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