Backroom story of demonetisation: From PMO to RBI, how it all played out

“Subject to future corrections based on verification process when completed, the estimated value of SBNs (specified bank notes — Rs 500 and Rs 1,000) received as on June 30, 2017, is Rs 15.28 lakh crore”

RBI Annual Report 2016-2017

It was evening news time in television studios that Tuesday. In the state broadcaster Doordarshan’s newsroom, a routine advisory had landed up from the government about a possible list of experts who could be called for their views on an expected news break. 

Just a few hours earlier on November 8, 2016, Prime Minister Narendra Modi had met the chiefs of the army, air force and navy. Rumour mills were working full time by now and there were whispers about likely wars that the government could announce. The list of possible experts that arrived around 7.30 pm surprised everyone. There were no security or military experts. Instead, plenty of economists, within and outside the government, filled up the list. Half an hour later, the PM announced demonetisation, India’s biggest-ever monetary gambit. 

There was also a Cabinet meeting in progress at 7 Lok Kalyan Marg. The items were fairly innocuous. Few except the secretaries concerned would remember them later. The government made no announcements on them the next day. One of the secretaries who was there with his minister was startled when he arrived home by 8 pm. “Look at the TV,” his wife told him. 

Some bureaucrats recalled that more than the usual number of officers from the Cabinet Secretariat and the Prime Ministers’ Office (PMO) were milling about near the Cabinet rooms that day. 

“Is something big about to be announced?” queried one of the officers at the venue. There was no clear answer as no one seemed to be in the loop.  

Yet, it was almost a year before the actual announcement that preparations or discussions had begun within the government, more specifically in the PMO, about demonetisation. Those meetings were attended by some of the top officers of the finance ministry, cabinet secretariat and PMO. As the Reserve Bank of India’s (RBI’s) then governor Raghuram Rajan says in his book I Do What I Do, he was asked for his opinion in February 2016 at one of those meetings, just days before the Budget was to be presented in Parliament by Finance Minister Arun Jaitley. “I was then asked to prepare a note, which the RBI put together and handed to the government. It outlined the potential costs and benefits of demonetisation”. There were preliminary discussions before that eventful meeting, but it was after the Budget that the process began in earnest. 

As Rajan adds, the deputy governor of the RBI in charge of currency attended the subsequent meetings through the summer. By September, Rajan had quit the RBI, but the core group remained unchanged. Even within the core group, members were not always aware of each detail — Rajan’s note was not mentioned in the meetings. 

One of the key queries asked in the run-up to demonetisation was whether the RBI’s currency department could stock up additional currencies of Rs 100 and Rs 50 to flood the economy once the high-value notes were withdrawn suddenly. It was given up for logistical reasons.

The officers were clear that such an exercise would not pass unnoticed. The annual requirement for currency notes was set at the beginning of the year and any massive ramp-up would be clearly noticeable to the staff. It would hold true whether the printing went on at the modernised and automated presses at Mysuru and Salboni or the much older ones at Nashik and Dewas.

The other key decision to make was the date of the announcement. “There was a window of opportunity just after Diwali for about a fortnight,” said an officer who had watched the developments from close quarters. Despite being a busy season, the rush of pre-Diwali consumption would be over. However, the final decision for November 8 was decided upon just weeks before D-Day. There was a proposal to push the date to a subsequent Friday to give banks the weekend to prepare themselves for the rush. But despite the secrecy, rumours were beginning to swish around about a possible demonetisation. For instance, in the monsoon session of Parliament, close to eight per cent of Rajya Sabha questions to the finance ministry was on black money. Members of Parliament asked more questions on it than about public sector banks. Something was afoot. 

Just about 24 hours before November 8, the core group informed the chiefs of the security agencies, including the Intelligence Bureau. Officers in those agencies lower down the line were informed just hours before, on that Tuesday. It was a calculated risk which was apparently debated within the core group and had been decided accordingly. Now there was no rolling back of the process. India had never been here before. 

Before the PM went live on Doordarshan, the decision had to be okayed by at least one Cabinet body. The obvious choice was the Cabinet Committee on Security, within which the finance minister and the home minister were already on board about the exercise through the year. The defence and foreign ministers, too, needed to be briefed, especially as there would be questions from the foreign capitals, about the move. 

In Mumbai, a similar exercise had begun in the RBI. Though Rajan’s successor, Urjit Patel, was already in Delhi, bank chiefs were asked to come over to the RBI headquarters for a meeting. A video conferencing meeting should have given them some clue, but surprisingly none of the chiefs seemed to have caught what was coming. 

As the cameras began rolling at the PM’s residence, both Revenue Secretary Hasmukh Adhia and former economic affairs secretary Shaktikanta Das, who were part of the core group, were back at their offices. “I called the joint secretaries to my room, switched on the TV and sat down to hear the PM,” one of them said. With the PM’s voice filling up the room, the officers were handed out their assigned duties. Calls to the police chiefs and chief secretaries in state governments began to go out. It was going to be a long night.