An in­sider’ s ac­count

Mint Asia ST - - Cover - BGY OPIKA G OPAKUMAR

For the hun­dreds of peo­ple who were go­ing about their work in and around the Re­serve Bank of In­dia (RBI) build­ing on Par­lia­ment Street in New Delhi, it was just an­other Tues­day. No one had any fore­bod­ing about the storm that was to hit the fi­nan­cial sys­tem hours later.

For R. Gandhi, then an RBI deputy gov­er­nor, 8 Novem­ber 2016 was any­thing but or­di­nary. He had flown in to New Delhi the same morn­ing to at­tend an ex­tra­or­di­nary meet­ing of RBI’S cen­tral board. The board was to en­dorse what would prove to be one of the most dis­rup­tive ac­tions in In­dia’s eco­nomic his­tory—the in­val­i­da­tion of 86% of cur­rency in cir­cu­la­tion by value at one stroke.

When Prime Min­is­ter Naren­dra Modi went on tele­vi­sion that night to an­nounce that Rs1,000 and Rs500 notes would cease to be le­gal ten­der from 9 Novem­ber 2016, Gandhi, who was in charge of cur­rency man­age­ment then, had his fin­gers crossed.

“I was busy go­ing through my check­list over and over again to be sure RBI was ready with the ac­tion plan to stem the blow of the an­nounce­ment,” Gandhi, who re­tired from RBI in 2017, re­called in an interview on 26 Oc­to­ber.

Gandhi had been a part of the dis­cus­sions on the note ban, which the Modi gov­ern­ment first pro­posed to the cen­tral bank in Jan­uary 2016, he said; so was then gov­er­nor Raghu­ram Ra­jan.

Typ­i­cally, with­drawal of high-de­nom­i­na­tion notes is a rad­i­cal mea­sure the gov­ern­ment would nor­mally re­sort to in an at­tempt to counter cur­rency forgery, one of the rea­sons Modi cited for the note ban, to­gether with un­earthing black money and curb­ing ter­ror fi­nance.

Ac­cord­ing to Gandhi, dis­cus­sions on coun­ter­ing the men­ace of coun­ter­feit notes had been un­der­way since 2008, when a sud­den surge was seen in the num­ber of these notes.

And from 195,000 pieces in fis­cal 2008, the num­ber of coun­ter­feit notes in­creased to 632,000 pieces in fis­cal year 2016. Ac­cord­ing to many ex­perts, a large pro­por­tion of these notes was com­ing from across the bor­der, from print­ing presses in Pak­istan.

“Ear­lier these notes were printed sep­a­rately and pasted. There­fore, one could make out that print­ing was not per­fect. But start­ing 2008 we saw notes which looked like typ­i­cal cur­rency notes,” said an of­fi­cial aware of the mat­ter. “This type of print­ing was never seen be­fore,” he added on con­di­tion of anonymity.

Thus be­gan RBI’S ef­forts to bring in a new se­ries of cur­rency notes in the coun­try. The prob­lem of coun­ter­feit­ing grew to such a mag­ni­tude that in the an­nual re­port for fis­cal year 2010, RBI cau­tioned that the risk aris­ing from these notes had as­sumed “crit­i­cal sig­nif­i­cance”.

“The bank con­tin­ued to work with the gov­ern­ment for in­tro­duc­tion of notes with new/ changed de­sign and new/up­dated se­cu­rity fea­tures in the year 2010. Other on­go­ing pro­grammes in­clude, with­drawal of old se­ries notes in a non-dis­rup­tive way, pub­lic aware­ness pro­grammes through print/elec­tronic me­dia/ posters, train­ing of cash han­dlers, co­or­di­na­tion with var­i­ous law en­forc­ing/ in­ves­ti­gat­ing agen­cies, and cre­ation of ad­min­is­tra­tive/other in­fra­struc­ture in banks,” said the an­nual re­port.

Many of­fi­cials be­lieve the surge in coun­ter­feit cur­rency notes was due to height­ened aware­ness among banks and in­creased use of note sort­ing ma­chines.

Sev­eral in­ter­nal com­mit­tees in­clud­ing one led by Gandhi were set up over the years to study the im­ple­men­ta­tion of new se­cu­rity fea­tures, de­signs and se­ries. By 2013, RBI was even ex­plor­ing al­ter­na­tives to phys­i­cal cur­rency such as plas­tic notes that are dif­fi­cult and ex­pen­sive to coun­ter­feit. A year later, the cen­tral bank an­nounced that it would phase out all cur­rency notes is­sued prior to 2005.

It gave a three-month win­dow to ex­change the old notes for new, af­ter which all such ex­changes, es­pe­cially for larger de­nom­i­na­tions, would need iden­tity and ad­dress proof. While this cre­ated quite a stir, RBI clar­i­fied that this should not be con­flated with de­mon­eti­sa­tion as it is a grad­ual phas­ing out of old notes over a pe­riod of time. This win­dow was kept open till the time gov­ern­ment an­nounced de­mon­eti­sa­tion on 8 Novem­ber 2016.

Mean­while, work was also go­ing on for in­di­g­e­niza­tion of cur­rency note print­ing in­clud­ing in the area of se­cu­rity fea­tures. The Bank Note Paper Mill In­dia Pvt. Ltd, a sub­sidiary of Se­cu­rity Print­ing and Mint­ing Corp. of In­dia Ltd and Bharatiya Re­serve Bank Note Mu­dran Pvt. Ltd, was set up in 2013 in Mysore, now My­suru. Un­til then, the coun­try was re­ly­ing on paper im­ported from over­seas com­pa­nies to print money.

“Around 18,000 mil­lion tonnes (mt) of paper was pro­duced to print new cur­rency notes be­tween April to De­cem­ber, 2016 at the paper mill, higher than its ca­pac­ity of 15,000 mt,” said a sec­ond per­son aware of the mat­ter on con­di­tion of anonymity.

While this was ad­e­quate to meet the im­me­di­ate de­mand be­fore de­mon­eti­sa­tion, RBI had to im­port nearly 30 mil­lion tonnes of notes paper to print cur­rency by the end of De­cem­ber 2016, the per­son added.

Rs2,000 note

In 2014, an in­ter­nal RBI com­mit­tee rec­om­mended the in­tro­duc­tion of high de­nom­i­na­tion cur­rency notes like Rs2,000 and Rs5,000 notes. Ac­cord­ing to Gandhi, there was noth­ing ir­reg­u­lar about the in­tro­duc­tion of Rs2,000 notes fol­low­ing de­mon­eti­sa­tion as RBI pe­ri­od­i­cally mulled in­tro­duc­tion of high-de­nom­i­na­tion notes. By late 2015 print­ing presses had been told to strengthen their de­sign ca­pa­bil­i­ties for in­tro­duc­tion of new notes, said the first per­son aware of the mat­ter.

While the sys­tem was pre­par­ing it­self for the in­tro­duc­tion of new notes, it was not un­til Jan­uary 2016 that the dis­cus­sions on de­mon­eti­sa­tion started.

Gandhi re­called that RBI was not in favour of de­mon­eti­sa­tion and ap­prised the gov­ern­ment about the reper­cus­sions of such a move, some­thing which has been cor­rob­o­rated by Ra­jan in his book, I do what I Do.

“I was asked by the gov­ern­ment in Fe­bru­ary 2016 for my views on de­mon­eti­sa­tion, which I gave orally. Al­though there might be long-term benefits, I felt the likely short-term eco­nomic costs would out­weigh them and there were po­ten­tially bet­ter al­ter­na­tives to achieve the main goals. I made these views known in no un­cer­tain terms,” Ra­jan wrote.

But in­sid­ers be­lieve that Ra­jan was in the know and gave his tacit ap­proval for each step lead­ing up to the even­tual de­mon­eti­sa­tion in­clud­ing ask­ing the presses to stop print­ing Rs1,000 and Rs500 notes. Ur­jit Pa­tel re­placed Ra­jan in Septem­ber 2016.

De­sign­ing the new cur­rency

Af­ter Fe­bru­ary, work on new cur­rency de­signs picked up speed. RBI’S in­ter­nal team re­worked the en­tire de­sign of new notes.

“Be­sides the ba­sic fea­tures, there were smaller changes made to the cur­rency like crop­ping Gandhi’s mous­tache, in­sert­ing the text RBI across Gandhi’s glasses, us­ing sym­bols which re­sem­ble Prakriti and other an­cient texts, etc,” said a per­son fa­mil­iar with de­sign­ing of bank notes.

It took 45 days and 18 de­sign­ers work­ing round the clock to com­plete de­sign­ing the new cur­rency.

An RBI of­fi­cial from the My­suru print­ing press would take the hard copy of the de­sign to the Prime Min­is­ter’s Of­fice for ap­proval. It was later sent back with changes back to the press.

“All com­mu­ni­ca­tion with re­gards to the new cur­rency was hap­pen­ing phys­i­cally to en­sure se­crecy,” said one of the peo­ple aware of the mat­ter.

In May 2016, RBI’S board ap­proved the in­tro­duc­tion of the Rs2,000, and within a month the cen­tral bank, in a let­ter, told the print­ing presses in My­suru and Sal­boni (West Ben­gal) to stop print­ing Rs1,000 and Rs500 notes. The presses were told to com­plete the work in progress and keep aside fresh paper.

The print­ing of Rs2,000 notes started in earnest by mid-septem­ber af­ter the new gov­er­nor Ur­jit Pa­tel took charge. The gov­ern­ment presses in De­was (Mad­hya Pradesh) and Nashik (Ma­ha­rash­tra) were print­ing Rs500 notes.

“We had to en­sure that min­i­mum value of new notes are avail­able be­fore the gov­ern­ment went ahead with de­mon­eti­sa­tion. Hence we de­cided to in­tro­duce Rs2,000 notes,” said Gandhi. “Ev­ery day was counted,” he added.

But the gov­ern­ment presses were lag­ging be­hind their pro­duc­tion tar­get, lead­ing to far fewer new Rs500 notes ready for cir­cu­la­tion, said one of the peo­ple aware of the mat­ter.

Main­tain­ing se­crecy

Though the gov­ern­ment claimed that the de­ci­sion to de­mon­e­tise Rs500 and Rs1,000 notes was known only to a hand­ful of peo­ple, a Hin­dus­tan Times ar­ti­cle dated 11 Novem­ber 2016 said the story was bro­ken by a Kan­pur-based Hindi jour­nal­ist al­most a fort­night be­fore the dra­matic 8 Novem­ber 2016 an­nounce­ment by the Prime Min­is­ter.

Dur­ing the same time, What­sapp mes­sages on new Rs2,000 notes were also do­ing the rounds.

“The news of introducing Rs2,000 notes leaked af­ter the notes reached cur­rency chests. Un­til then all the staff of print­ing press kept it a se­cret,” said the first per­son cited above.

Gandhi de­fended the em­ploy­ees of the print­ing presses.

“The loy­alty of the press em­ploy­ees is com­mend­able. They un­der­stood that cur­rency-re­lated in­for­ma­tion will have to be kept con­fi­den­tial,” Gandhi said.

Many be­lieve that the news of the Rs2,000 notes hit­ting the mar­ket cre­ated quite a flut­ter within the gov­ern­ment and this led to the gov­ern­ment ad­vanc­ing the an­nounce­ment.

“I un­der­stood gov­ern­ment’s se­ri­ous in­ten­tion for de­mon­eti­sa­tion in April it­self from the way dis­cus­sions were go­ing on, though no de­ci­sion had been in­di­cated then,” said Gandhi.


Rad­i­cal mea­sure: While the sys­tem was pre­par­ing it­self for the in­tro­duc­tion of new notes, it was not un­til Jan­uary 2016 that the dis­cus­sions on de­mon­eti­sa­tion started.

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