Five questions the parliamentary panels must ask RBI governor Urjit Patel on demonetisation

If it wasn’t already clear before the Reserve Bank of India said so, it’s even more evident now that the central bank did not come up with the idea of demonetisation. Union Minister Piyush Goyal may have declared that the RBI board recommended the withdrawal of high-value notes, but it only did so after the government “advised” it to do so. So asking Urjit Patel, who appears before Parliament’s Finance Standing Committee on Wednesday, what were the reasons behind the effort may not lead anywhere.

But that doesn’t absolve the central bank’s role in what was evidently a badly implemented effort that caused economic stress and even led to several deaths. More worryingly, we still have very little information about what the specific aims of the move were, and more than two months later, no sense of what it has achieved.

The Opposition had a chance to put direct questions to the government and hold it accountable in the Winter Session of Parliament in December. Instead, various leaders seemed more interested in scoring points and turning it into a nationwide campaign against demonetisation that hasn’t taken off.

As with most legislative processes these days, the real work seems to be happening in the various Parliamentary panels. It’s through the questioning of the Public Accounts Committee that we finally got the admission that the idea for demonetisation officially came from the government. And over the next few days, Patel will face the finance panel and the Public Accounts Committee.

This means an opportunity to get more details about the massive move that somehow remains hard to pin down.

1. Where are the calculations?

The government’s advice to the bank was that demonetisation would mitigate the triple problems of counterfeiting, terrorist financing and black money. But such enormous decisions do not, or should not, take place just because authorities believe something might be true. Did the RBI look at evidence or calculations, presented by the government or otherwise, that convinced them the gains of demonetisation would be more than the shock it caused to the economy?

2. What were the specific aims?

The broad aim was to attack counterfeiting, terrorist financing and black money, never mind the later messages about a cashless economy. Naturally, even an effort as large as this will not end any of these problems, but the intention is that the shock should seriously bring the numbers down.

• Black money: The government has already said it had no estimate of black money before or after November 8. Cash has amounted to just 6% of undeclared assets the Income Tax department has found in its raids over the last few years. Does the RBI have an estimate for the amount of black money? If it doesn’t, what amount of currency declared through the government’s two amnesty schemes does it expect as an adequate indicator that demonetisation worked?
• Fake notes: RBI data suggested that seven in every million notes in circulation in 2015-’16 were fake. That’s 0.0007%. But a large number of fake notes go undetected. The RBI can expect better detection with new notes, but they are also supposed to be more secure and harder to counterfeit. Does the RBI then believe that, after demonetisation, the number of detected fake notes in circulation will be even lower than 0.0007%?
• Terror financing: Is there an estimate of how much Indian currency goes into terror financing? What does the RBI expect this to come down to?
  

If the central bank is unable to answer these questions, it suggests that we went into the move without any data and are coming out without numbers either. It is obvious decisions at this level or not binary or zero-sum, they have to be calculated risks. Again, where are the calculations? Without these numbers, how will we know if the move succeeded?

3. What is the cost?

In time, we will learn of the economic cost of this effort, as data on how the economy performed over the last few months comes in. The RBI has already lowered its Gross Domestic Product growth rate expectation from 7.6% to 7.1%.

But what of the actual cost of the currency exchange move? What did it cost to print all that currency, which some are putting at Rs 12,000 crore? What were the labour costs in turning banks over to currency exchange efforts from November 8 onward, continued till today? What is the estimated productivity lost in forcing banks to spend most of the last two months on these efforts? It’s worth looking at the quantifiable cost of the exercise, before starting to factor in the shock to the economy, which will become clearer over the next few months.

4. Is everything okay with the RBI’s functioning?

When the RBI board, based on the government’s advice, recommended demonetisation it was at its smallest size in years. The RBI Act provides for 19 directors, with the suggestion that at full strength there is one more independent director than internal. On November 8, it had just 10 directors, and only three independent ones.

Meanwhile, reports have suggested that the printing of the Rs 2,000 note began months before November 8, and indeed the RBI has said that its offices were already receiving stock of the new notes on that day. Yet the laws require the RBI’s board to recommend the design, form and material of bank notes. However, before November 8, the RBI’s board hadn’t made any recommendations on the Rs 2,000 note. Did the government bypass it?

Similarly, was there provision made for the expenditure that the RBI might have to incur as part of this move? Did the RBI board deliberate on this?

These might seem like technicalities – and indeed compared to some of the larger questions of demonetisation they are – but they still suggest the RBI isn’t functioning as the law says it should, and that’s a problem. Is the governor concerned? What is being done about it?

5. Whose life is in danger?

The RBI refused to answer a Right to Information request, demanding details on the number of demonetised notes already in banks on the night of November 8, according to Bloomberg. The central bank did so citing a provision that allows for requests to be blocked if there is a danger to the life or physical safety of anyone who disclosed this information to the public. Whose life could possibly be in danger if they disclosed this information?