(Bloomberg) -- India’s central bank refused to share specific details of Prime Minister Narendra Modi’s ban on high-value banknotes citing danger to life and national security, as the mystery deepens over who took the unprecedented decision.
The Reserve Bank of India recommended the move, which was accepted by the cabinet and announced by Modi on Nov. 8, Power Minister Piyush Goyal told parliament in November. The RBI board approved the ban three hours before Modi’s speech and hadn’t discussed the matter before, a slew of responses to Bloomberg News’s Right to Information requests show.
However, the RBI told a lawmakers’ panel this week that the government had "advised" the monetary authority to "consider" the ban a day before the RBI board made its recommendation. The government then "considered the recommendations" and decided to withdraw the notes, culminating in Modi’s address that blindsided the nation.
The cloak of secrecy that has shrouded the currency ban decision is likely to bolster the view that authorities, both on Mint Street and in New Delhi, were not prepared for such a decision and the way it was announced. It risks undermining perceptions of the central bank’s independence and raises questions about Modi’s decision-making style and his communication with the RBI.
More clarity may emerge when RBI Governor Urjit Patel deposes before a parliamentary committee on Jan. 20. Details are essential to help assess the success of the shock move as well as gauge the impact of the decision on Asia’s No. 3 economy.
"It is very perplexing that the RBI doesn’t answer questions about how the decision was arrived at," said Shilan Shah, Singapore-based India Economist at Capital Economics. "There are concerns that in the whole process the RBI has been sidelined by the government and that raises questions about its independence," he said, adding that authorities have not been transparent.
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Right to Information
Bloomberg News asked the RBI 14 questions between Dec. 8 and Jan. 2.
- The central bank as of Jan. 11 had answered five, disclosing the date and time of the RBI’s board meeting and the fact that the board had never discussed demonetization before Nov. 8
- It said it doesn’t have information to answer one question, on how many of the worthless notes have been deposited at commercial banks
- It transferred two questions on printing of new notes to organizations that manage the presses
- The RBI said that a question asking "what prompted the board to discuss and approve the withdrawal of notes" doesn’t come under the definition of "information" under the RTI Act
- It provided different answers to a question asked three times, seeking details on board members who opposed the move. In two replies the RBI said "it is a matter of fact that the decision was unanimous." In a separate response, it said "this information is not available on record"
- To a question seeking details on the number of demonetized notes already at banks on the evening of Modi’s speech, the RBI claimed an exemption, citing danger to the life or physical safety of anyone who disclosed this information to the public
- The RBI also claimed exemptions on two questions seeking detail on its preparations for the demonetization and studies it used to forecast the impact of the move. Sharing these "sensitive matters" would endanger India’s sovereignty, integrity and security, according to the RBI
The use of those specific exemptions are "perplexing," Capital Economics’s Shah said. Shailesh Gandhi, a former bureaucrat with the Central Information Commission, told the FirstPost website on Dec. 31 that the RBI’s attitude of stonewalling smacked of "sheer arrogance."
"What the RBI is doing by refusing to answer queries under RTI is denying citizens their fundamental rights," Gandhi said.
Lawmakers are also seeking answers. Parliament was gridlocked as the opposition demanded discussions and voting on the measures, the Supreme Court is hearing petitions against the legality of the steps, and two lawmaker panels have sought explanations from the RBI.
The move to ban high currency bank notes was an economic disaster with the worst yet to come, Former Prime Minister Manmohan Singh told a gathering of opposition Congress Party workers yesterday.
The decision to demonetize was taken only when the stock of new currency notes was reaching a "critical minimum," enough to meet a significant part of demand, the RBI told a panel in a note accessed by Bloomberg News. About 4.6 trillion rupees of notes had been issued a month into the program, RBI data show, less than a third of the 15.4 trillion rupees sucked out by the Nov. 8 demonetization.
However, the currency swap was riddled with rule changes and data that analysts have questioned. Patel will depose before another lawmaker panel on Jan. 20, which is expected to seek his view on the impact of the demonetization on India’s economy.
"The institutional identity of the RBI has been damaged," former Governor Yaga Venugopal Reddy told CNBC this week. Rahul Gandhi, a leader of the main opposition Congress party, repeated the accusation, attacking Modi for ruining the credibility of the central bank.
A decision of this magnitude involves both the government and the RBI, and the RBI Act allows the government to direct the RBI on matters of public interest, said GVLN Narasimha Rao, a spokesman for Modi’s Bharatiya Janata Party. "So the decision has to be a government decision taken by the Prime Minister. I am sure he has consulted with the RBI and others before he took the decision," Rao said. Two calls and a text message to Modi’s office went unanswered.
Economic Affairs Secretary Shaktikanta Das told reporters on Nov. 8 that there was "no need to go into the process which led to this decision." Neither Modi nor his ministers have disclosed the names of their advisers. The RBI has already told Bloomberg News that its board didn’t discuss demonetization before Nov. 8.
"I repeat, the RBI is in complete concurrence with the government. There is no disharmony. There is no disagreement," Rao said. "Anyone who thinks that the RBI was not a party to the decision is lying deliberately and mischievously."
Economists say the shock of the demonetization will push India’s growth down to 6.8 percent in the year through March from 7.6 percent the previous year. While supporters say it will help curb tax evasion and graft, critics point to reports of job losses and a slump in demand in a market where 98 percent of consumer transactions are made in cash.
The RBI board meeting on Nov. 8 to discuss demonetization and its impacts lasted not more than 30 minutes, former Finance Minister Palaniappan Chidambaram said in televised comments on Wednesday. He added that when his Congress party sought the agenda and minutes of the meeting, the RBI declined to make them available.
"The government and RBI have differences," Chidambaram said. But "never before in India’s history has such a farce been enacted."
(Updates with bureaucrat’s comment in second paragraph under ’Complete Concurrence’ subhead.)
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