Vol. XLI No. 04 January 22, 2017

The Reserve Bank’s Fall

Prabhat Patnaik

THE point here is not that the Reserve Bank of India imposed on the working people of this country an utterly witless and utterly oppressive demonetisation; the point is rather that it had very little say in the matter. If it had put forward its own views in a forthright manner, no matter what those views were, whether in favour of or against demonetisation, and, even if opposed to demonetisation, had ultimately fallen in line with the government’s wishes, in deference to the constitutionally-ordained status of the country’s executive, then it would have become less of a laughing stock than it is now. Of course it could not have expressed itself in public on these issues; but word on its stance, had it taken an independent stance, would have come through the grapevine and spread across the country, and it would have commanded respect among people even if they did not agree with it. It has become a laughing stock not because of its views, which appear to have been non-existent, but because it has willfully turned itself into a mere camp-follower of the government.

To be sure, democratic opinion all over the world has been, quite rightly, opposed to Central Bank autonomy, for that would typically mean a person acceptable to international finance capital being put in charge of the central bank, and his or her pursuing the set of economic policies demanded by finance capital, in utter disregard of the priorities of the elected government of the day. Ultimately, since the views of the elected government must prevail over those of the appointed Central Bank governor in a democracy, autonomy of the central bank is fundamentally anti-democratic. But underlying this entire discussion on autonomy is a presupposition, namely that the central bank has independent views of its own; and the debate is about whether or not they should prevail. Our central bank in this instance alas is not known to have had any views worth the name.

Opposing the autonomy of the central bank therefore is not the same thing as opposing its having independent views. On the contrary, when scrutiny takes place by the ultimate authority in a democracy, namely the legislature that is directly elected by the people, of the views of both the executive and the central bank, the latter’s not having clear-cut and independent views becomes a hindrance to such scrutiny. It becomes possible for each of the two entities, the executive and the central bank, to put the blame on the other, if things go wrong with a policy measure, thus exonerating both from any specific responsibility for wrong-doing. The central bank’s having a clear and independently-formulated opinion, and yet not having the kind of autonomy demanded by neo-liberalism, is therefore an essential prerequisite for democratic functioning. Such functioning in short demands both: lack of autonomy of the central bank, and independence of thinking on its part.


It is this independence of thinking which the Reserve Bank of India did not have on the crucial issue of demonetisation. And its effort to present itself as having been in the loop all along has only succeeded in making it an even bigger laughing stock than otherwise. I shall just cite four instances of the pathetic state to which the Reserve Bank has sunk, prompting even its employees’ organisation to demand that it assert itself in the matter of discharging its own legal responsibilities.

The first instance relates to the fact that the full board meeting of the RBI that approved the demonetisation measure occurred just three hours before Modi went on air announcing it. The Board meeting in short was a mere formality. The Board currently consists mainly of government representatives, with the other slots remaining unfilled because of deliberate government tardiness. The highest decision-making body of the Reserve Bank therefore has become a mere rubber-stamp for government decisions taken on matters that fall within the jurisdiction of the Reserve Bank. And what is more, the government treats it as such, for Modi would not have booked slots on television a mere three hours after the Board meeting, unless he was certain of the meeting’s outcome. To be sure, the RBI’s top brass cannot be faulted if the government drags its feet over the appointment of its non-official Board members; but there has been no report of their having expressed their insistence that the government should constitute their Board to its full strength.

The second instance relates to the answers reportedly submitted by the RBI to the parliamentary committee currently looking into the demonetisation decision. It claims that there was mutual consultation and eventual agreement between the government and the RBI on the measure, but the main motive it cites as driving it is very different from what the government has been emphasising. It cites counterfeit currency as its main motive, while the government, though mentioning counterfeit currency in passing, has all along been presenting demonetisation as an attack on “black money”. Quite apart from this difference between the two positions, the question arises: since the value of counterfeit currency is quite minuscule, a mere Rs 400 crores according to an Indian Statistical Institute study (whose authenticity the RBI has not questioned), which comes to a mere .022 percent of the total value of currency, why was such a draconian measure, as the demonetisation of 86 percent of the total value of currency required for tackling it? Besides, why was it necessary to demonetise with immediate effect (in four hours’ time after Modi’s announcement), causing immense hardships to the people, if attacking fake currency was the motive? And finally, if fake currency was the target then why has the government repeatedly asserted that it would not replace the entire demonetised currency by new notes of an equal value, without the RBI expressing any disagreement with this position? The government’s argument on this is that such a shortfall would push people towards cashless modes of transacting; but if the RBI’s concern has been with fake currency and not with pushing people towards cashless transactions, then there is no earthly reason why it should acquiesce in such a shortfall. Why then has it acquiesced? Clearly its pronouncements on this entire issue lack credibility.



The third instance relates to the statement of its senior-most deputy governor, Gandhi as reported in The Wire on January 12. At a press conference shown live on television, Gandhi had claimed that between November 10 and December 5, the RBI had supplied 19.1 billion pieces of lower-denomination notes, of Rs 100, Rs 50, Rs 20 and Rs 10, which, according to him, was “more than what the Reserve Bank had supplied to the public in the whole of the last three years”. This was an absurd statement, since, as the report in The Wire makes clear, in the three years 2013-14, 2014-15, and 2015-16, the RBI had supplied 50.2 billion pieces of such small denomination notes. As The Wire clearly establishes, Gandhi’s was an obvious untruth, which the RBI had originally put up as part of Gandhi’s speech on its website but subsequently removed when an edited version was substituted for the original. Gandhi was simply resorting to an untruth to give an impression that the RBI had been concerned over the distress to the people in the wake of demonetisation and prepared to counter this distress. The fall of the RBI can be gauged from the fact that its senior-most executives are prepared to resort to untruths even in factual matters.

My fourth instance relates to the fact that a joint secretary of the finance ministry is at present, according to the Employees organisation, co-ordinating currency management at the RBI. When the RBI had put out figures on the high percentage of demonetised notes that had come back to the banking system(this figure turned out ultimately to be 97 percent), finance ministry bureaucrats had questioned the RBI figures. The appointment of a joint secretary of the finance ministry to co-ordinate currency management, if he is actually going to be doing this job, is a commentary on the utter spinelessness of the RBI at present; if it is a means of fudging figures at the RBI, then matters are even worse.

All these instances, taken together, present a very sad picture of the current state of an institution that has been in existence for over eight decades and has seen some of India’s most illustrious economists managing its affairs.Of course, authoritarianism flourishes only on the ashes of institutions, so that the effort of the Modi government to destroy the RBI as an institution is true to its character. What is tragic is the complete absence of any resistance on the part of the RBI authorities to the destruction of the institution over which they preside. Along with the absurd saga of demonetisation, the people of this country are being forced to witness the willful destruction of one major institution after another; and the Reserve Bank of India is the latest of these.