Here's how RBI managed demonetisation

By R Gandhi,
Former RBI deputy governor

On November 8, 2016, the Government of India announced the demonetisation of all Rs 500 and Rs 1,000 banknotes of the Mahatma Gandhi Series. Now that a year has passed since that momentous decision, let's see how it was planned and executed, contrary to criticisms that the Reserve Bank of India was underprepared.

Planning
When do we call an exercise a 'planned' one? When it includes a detailed analysis of the idea, its definition, scope and its elaboration, legality thereof, merits and demerits of the proposal, alternatives and options to the idea, clear timelines and managing after-effects of the programme.

The demonetisation programme did have all these elements. When demonetisation commenced, not much information was available to people beyond the core group. It was sudden and totally unexpected. Nor was the introduction of new series of banknotes, which were a complete departure from the past, be it size, look, colour, design and orientation. So, the critics were quick to conclude it was an unplanned and a whimsical one.

But the critics were wide off mark. Dr Raghuram Rajan, in his latest book "I Do What I Do" has effectively countered this by saying that the discussions on the idea of demonetisation started in February 2016 itself. The bank had presented to the government a detailed analytical note on the matter duly enumerating the pros and cons of the idea, the likely impact and consequences, alternative ideas and, should a decision be so taken, the necessary preparation needed for proper implementation.

After several rounds of discussions over several weeks on the idea and on the note on, to repeat, pros and cons, impact and consequences, alternatives and needed preparations, can anyone say the programme was 'unplanned'?

Between November 9 and December 30, there were restrictions on cash withdrawals and long waiting period for exchanging of or depositing the high denomination notes. ATMs were closed during initial days leading to conclude the RBI was underprepared for it.

What would have been a "perfectly prepared programme"?

One with the readiness to exchange 'one for one' for each piece of the old notes of Rs 500 and Rs 1,000. That would have meant that the RBI and the banking system had all by the start of the programme new series notes worth not less than Rs 15 lakh crore. It would have meant not less than 23 billion pieces of new series notes (2 billion pieces of Rs 2,000 notes to replace the then existing 4 billion notes of Rs 1,000 in circulation and 21 billion pieces of the new series notes of Rs 500 to replace the old notes of Rs 500 piece for piece) should have been printed and accumulated by the time the programme commenced.

It would have meant a lead preparation period of not less than 15 months for designing, procuring paper, ink and other ingredients and printing of the new series notes of that high volume. It would be obvious that such a choice would remain a theoretical solution and not a pragmatic or even an optimal solution. Further, such a preparation would have been a 'note withdrawal programme.' Hence, a reasonable, comfortable and critical minimum quantum of new series notes was determined to be readied and production plans were afoot to ensure that.

Working the printing presses at their full capacity exclusively for the new series notes, arranging three tier — a hub, sub-hubs and spokes model—for faster distribution of new series notes, detailing additional security, larger and higher turnaround of logistics, etc., were put in place. The pace at which the deposit of old high denomination notes and the pace at which the remonetisation would happen and the ways to manage the gap were determined. It can be recalled that except for the initial burst of huge deposit of old notes during the initial weeks, the calculated risk in managing the gap had been orderly.

The initial high gap had definitely been anticipated. Waiting for narrowing down that gap would have meant additional six to eight weeks of preparation, but the programme would have got delayed much longer. ATMs are a story by itself. During the planning stage, we had very clearly identified that dispensing new series notes through ATMs has several advantages for the success of the programme.

Equitous distribution, at all and convenient times to the public, more than doubling of the touch points for withdrawal of cash, demonstration of availability are just to name a few critical advantages. On the flip side, preparing all the two-lakh-plus ATMs spread across the country for the new series notes, which is a physical exercise to be carried out in each ATM location and the paucity of the technically qualified labour force to carry out this activity and the need for confidentiality compelled recalibration of ATMs to be a post-announcement exercise, rather than a pre-announcement exercise as one would have preferred.

The negative publicity in the media of the status of availability of ATMs was immense. With the benefit of hindsight, I wish that we had handled the ATM issue differently. Yet another blow to our plans was the public behaviour (or should I say non-behaviour) relating to digital payments.

We had factored that once people had deposited their old cash into bank accounts and with the limits/restrictions on withdrawal of cash, the availability of digital means would lead to more transactions through RTGS, NEFT, internet and mobile banking facilities. Unfortunately, and to our dismay, this expectation had not been fulfilled.

Digital transactions did increase, both in quantum and value. But that had not been high enough to make a big dent on the gap we had wanted the digital modes to shoulder.

Implementation
The implementation of the programme was as per the plans agreed on. The currency management wings of the Reserve Bank and the banking system were geared up for long hours on weekdays and to work on holidays. Additional manpower was deployed, including contracting retired personnel. The presses also enhanced their labour force; worked on long shifts and on holidays as well.

Direct touch points for cash delivery were trebled in number. Turnaround period of logistics were shortened. Airlifting of currency was adopted to rush stocks to needy locations. Daily monitoring of production, supply, delivery, demand, withdrawal and stock were intensely monitored at multiple levels. Lower denomination notes were issued in plenty. The RBI received a lot of flak for corrections and adjustments. One comment was that the RBI issued fifty instructions in the fifty days; a circular a day; quite a few were reversal of earlier instructions.

Several reversals were as per plan and others were in response to expressed difficulties; majority were relaxation of limits and removal of restrictions. The only reversal of an instruction which had not been originally well thought out relates to conditions for enhanced cash withdrawal for marriages.

Aberrations like money mules getting employed to exchange the old notes, Jan Dhan Yojana accounts being misused, involvement of bank personnel in abetting inappropriate exchange, etc., had been foreseen; but was planned to tackle in usual course than diverting considerable energy, resources and time during the programme period.

However, a few days into the programme, to address the money mules problem, use of voting ink to identify the persons exchanging the notes was adopted and it had a good deterrent effect. Thus, the demonetisation programme had a detailed plan of action; large scale preparations preceded the commencement date; execution was to the script; and unanticipated mid-course corrections were minimal.
Source:EconomicTimes