Policy and policy-making as ‘fait accompli’

Even while turning it into academic and fait accompli, the court verdict could have addressed important governance issues (short for rash policy making and undermining democratic checks and balances) to prevent recurrence: by fixing the Centre’s accountability and transparency and the RBI’s institutional integrity. As for the Parliament’s absence in such a key policy decision, the court found nothing amiss even while finding that the Specified Bank Notes (Cessation of Liabilities) Act of 2017 was a post facto development.

The verdict didn’t examine the “wisdom” by stating that it is “best left to the wisdom of the experts”; even the dissenting one says the policy was in “the best intentions” and for a “noble objects for the betterment of the Nation”.

These observations ignore that this “wisdom” was contrary to what domain “experts” had said over a long period of time – (a) the 2012 Finance Ministry’s white paper (b) the 2014 SIT (c) Rajan’s “verbal” presentation, RBI’s subsequent “note” and reply to the Karnataka committee in February-March 2016 and (d) the “minutes” of the RBI’s Board of Directors rejecting the Centre’s key arguments.

The court also ignored post facto evidence that demonetisation hurt the people and the economy. Cash was rationed for months and more than 100 died in the queues (apart from massive and overnight loss of jobs and businesses). The GDP growth fell from 8.3% in FY17 (the demonetisation fiscal) to 3.7% in the pre-pandemic FY20.

Demonetisation failed to achieve any of its stated, and later added, goals.

Cash-in-circulation (CiC) has risen sharply from 10.7% of the GDP at the time of demonetisation (FY17) to 14.4% in FY21 and 13.7% in FY22 – thus, outstripping gains from digitisation of transactions and claims of bringing transparency in financial dealings.
Tax efficiency has fallen from 11.2% of the GDP in FY17 and FY18 to 9.9% in the pre-pandemic FY20. In FY22, it was 10.8% and in FY23 it is expected to fall to 10.7% – still below the FY17/18 level.
Black money didn’t extinguish as 99.3% cash came back to the RBI and the rest 0.7% was locked in (a) currencies “confiscated or seized by enforcement agencies or produced before a court on or before December 30, 2016” (b) “exchange” of currencies held by District Central Cooperative Banks (DCCBs) “pending before the Hon’ble Court” and (c) currencies with Nepali “citizens/financial institutions”. The final tally was never disclosed. The “windfall gains” never materialised, despite a witch-hunt by the IT department.
Since ₹2,000 currency notes (not available until then) were issued immediately in 2016, the scope for storing black money in high-currency notes became far easier, not tougher.
No claim has been made or evidence provided by the Centre and RBI in their affidavits or argued by their lawyers that terror funding and incidents have stopped.
The only evidence of a positive gain the RBI gives in its affidavit is that counterfeit notes have reduced – but the RBI’s minutes had said in November 2016 that this was too small and insignificant to begin with (0.26%).

The sum and substance of the demonetisation saga then is, had the Centre acted wisely, taking into consideration the experts’ views, that of the RBI’s or its own committees (white paper and SIT) or opted for course correction when it became evident that demonetisation was not working, much of the pain to the people and the economy could have been averted. The court, on its part, could have intervened timely, and not waited for six years, it would have helped the people and the economy too. Even now, six years later, it could have fixed accountability, paved a more rational policy making and procedures to prevent recurrence. Worse, the risk of another preventable economic misadventure remains.

SC verdict on demonetisation

Why demonetisation verdict raises more questions than answers