How Narendra Modi kept note ban close to his chest

Prime Minister Narendra Modi handpicked a trusted bureaucrat to spearhead a radical move to abolish 86 per cent of the country’s cash overnight and take aim at the huge shadow economy.

Hasmukh Adhia, the bureaucrat, and five others privy to the plan were sworn to utmost secrecy, say sources with knowledge of the matter. They were supported by a young team of researchers working in two rooms at Modi’s New Delhi residence, as he plotted his boldest reform since coming to power in 2014. When announced, the abolition of high-value banknotes of Rs 500 and Rs 1,000 came as a bolt from the blue. The secrecy was aimed at outflanking those who might profit from prior knowledge, by pouring cash into gold, property and other assets and hide illicit wealth.

 

Overseeing the campaign, with support from the backroom team camped out at Modi’s sprawling bungalow in the capital, was Adhia, a top finance ministry official.

The 58-year-old served as principal secretary to Modi from 2003-06 when he was chief minister of Gujarat, establishing a relationship of trust with his boss. Colleagues interviewed by Reuters said he had a reputation for integrity and discretion. Adhia was named revenue secretary in September 2015, reporting formally to Finance Minister Arun Jaitley. In reality, he had a direct line to Modi and they would speak in their native Gujarati, when they met to discuss issues in depth.

In the world’s largest democracy, the demonetisation was revolutionary: it called into question the state’s promise to “pay the bearer” the face value on every banknote.

Immediately after the announcement, Adhia tweeted: “This is the biggest and the boldest step by the Government for containing black money.”

The boast harked back to Modi’s election vow to recover black money from abroad that had resonated with voters fed up with the corruption scandals that plagued the last Congress government. Yet in office, he struggled to keep his promise.

Over more than a year, Modi commissioned research from officials at the finance ministry, the central bank and think-tanks on how to advance his fight against black money, a close aide said.

The topics were broken up to prevent anyone from joining the dots and concluding that a cash swap was in the offing.

“We didn’t want to let the cat out of the bag,” said a senior official directly involved. “Had people got a whiff of the decision, the whole exercise would have been meaningless.”

Under Adhia’s oversight, the team of researchers assembled and modelled the findings in what was, for it, a theoretical exercise. It was made up of young experts in data and financial analysis; some ran Modi’s social media accounts and a smartphone app that he used to solicit public feedback. Yet for all the planning, Modi and Adhia knew they could not foresee every eventuality, and were willing to move swiftly.

Secrecy was paramount, but clues had been left.

Back in April, analysts at State Bank of India said demonetisation of large-denomination notes was possible. The Reserve Bank of India also disclosed in May that it was making preparations for a new series of banknotes that were confirmed in August when it announced it had approved a design for a new Rs 2,000 note.

The printing presses had only just started turning when the media finally started to run with the story in late October.

“The plan was to introduce it around November 18, but there was a clear sign that it could get leaked,” said one person with direct knowledge who, like others interviewed by Reuters, asked not to be named.

Some officials in the finance ministry had expressed doubts about scrapping high-value notes. They now feel resentment at the secrecy in which Adhia rammed through the plan on Modi’s orders. They say the plan was flawed because of a failure to ramp up printing of new notes ahead of time. Other critics say the Adhia team fell prey to a form of “group think” that ignored outside advice.

In the words of a former top official who has worked at the finance ministry and RBI: “They don’t know what’s happening in the real world.”