So the new Governor of the Reserve Bank of India (RBI), Shaktikanta Das is not an Economist by training or education. Yet, Modi saw something in him that made him eminently suitable for the post of Governor. Team PGurus dug deep to find out the reason and here is our diagnosis. Some dots have been connected and the t’s have been crossed and i’s dotted.
RBI dividend to the Government
Every year, around August, the RBI pays a dividend to the Government. This year it was Rs.50,000 crores, paid in the month of August. This was 63% higher than the previous year, which was Rs.30,569 crores. But in 2016, RBI had paid out Rs.65,876 crores. The shortfall in 2017 was explained as being due to the cost of printing new currency notes, following demonetisation.
Why did Urjit Patel resign?
The amount of reserves at the RBI is around Rs.10L crores (ten lakh crores). A dividend of 50,000 crores would be about 5% of the reserves. Now the world over, the Central Banks keep around 70-75% reserves. The formula is complicated so we will spare you the details. The RBI was playing it conservatively and keeping 95% of the reserves.
Two weeks ago, a report by the Bank of America Merrill Lynch (BoAML) suggested that the surplus with the RBI currently is between Rs.1 – 3 Lakh crores and that could be transferred to the government. The Modi government wanted to use this surplus to fund some of its initiatives and Patel was allegedly not allowing it. This has been going on for a while and when the BoAML report came out, the Government perhaps pressed the issue with the RBI Governor, who decided to quit, rather than sign off on it.
Why was Patel not allowing it? For this, we need to go back to the days of Demonetization.
Demo decision was taken on Feb 19, 2016
It is reliably learnt that the decision to demonetize the Rs.500/ 1000 notes was taken by the Prime Minister (PM) on Feb 19, 2016. RBI had to be notified so they could print the new Rs.2000 and Rs.500 notes. They had nine months to do it. Raghuram Rajan was the RBI Governor at that time. Despite his alleged closeness to the former Finance Minister P Chidambaram, Rajan did not disclose this to him. Nor was Arun Jaitley told. At least in this case, he acted with integrity.
Who knew about Demo?
A war room was created in the house of PM Modi where a select group assembled to work on this project. A group of six worked day and night on this. Some of them were from the Ministry of Finance and they did not even tell their boss, the Finance Minister! We are going to name a couple from this group of six here – Hasmukh Adhia and Shaktikanta Das. One was the Revenue Secretary while the other was the Secretary of Economic Affairs. Demonetisation was to have been done on November 18th but it was brought forward by 10 days and announced on November 8th.
November 8th – Demo Day
Modi recorded his speech for the nation about six hours before the announcement. The Cabinet convened around 7 PM and by 7:30, the resolution to have Demonetisation done was passed. All the ministers were in a room while the PM went to inform the President. The recorded speech was telecast at 8:15 PM by Doordarshan and other channels. All channels were told to standby for an important telecast by the PM. Since it was around the time of Surgical Strike, all channels were thinking that something serious was going to happen with Pakistan/ China. The Demo announcement came as a complete surprise. Officials must be commended for keeping this a secret till it aired.
That Arun Jaitley did not know of this is proved from a couple of incidents – he was to leave abroad on the 7th of November but was told by the Cabinet Secretary to cancel his trip and that an important meeting was scheduled for the following day. Why he was not informed? Did PM know that if AJ knows, then Chidambaram will know and then Congress and so on?
Naresh Agarwal let the cat out of the bag, when he asked Arun Jaitley in the Rajya Sabha, “How come you did not whisper this in my ear?” Even though he referred to himself, he actually meant P Chidambaram!
Shaktikanta Das, while keeping Jaitley in the dark, signed deals with Currency note manufacturer De La Rue of UK, for printing new Rs.500 and Rs.2000 notes.
The Demonetisation announcement caught Sonia Gandhi by surprise and she was livid at Chidambaram for not knowing it. Clearly Congress too was a victim of the sudden announcement.
Why didn’t the FM resign?
The Finance Minister had no clue this was happening – his own secretaries did not tell him. If Jaitley had any self-respect, he would have resigned – the PM had done an end run around him. The PM trusted his subordinates but not him. He should have said, “I am slighted – I resign”. That would be principle-based Politics. But what can a man who has never won a Lok Sabha election do except sulk and lump it? Well, he did do something…
To pre-empt what played out, it was suggested that an Income Tax (IT) Officer be posted in every bank and take video of all the receipts coming in. This would have been akin to seeing the Ghost for the tax offenders as IT officers know most of them. It would have also made the task of the IT officers easier for processing the fake notes later (a lot crept in). But Jaitley put his foot down and did not allow it.
In all their planning, the six wise men did not remember or underestimated the work ATMs have to undergo, to support the new sizes. And ATM technicians are few and far between (about 4000 in the whole country) and it takes up to 5 hours to fix one machine. Clearly they could not be told of the changes ahead of the announcement.
One other critical error was not checking the daily remittances of old notes being deposited in the banks. Corrupt Bank officers made a killing accepting notes with 10-30% commission from Black money holders. It took two years to count and profile the data on the old notes returned. And we still don’t know how much of it was counterfeit.
Das was changing the rules on a daily basis while Govt. was also fire fighting with many politicians who owned Co-operative Banks.
Thus, the implementation collapsed and now almost all the black money is back in the system. Urjit Patel was a bystander as this played out and was hauled over the coals by the various Parliamentary Committees and Right to Information (RTI) requests.
Back to SKD
PGurus had written about the two finalists that it saw as the candidates for the RBI Governor (one of them was Das). Even though Das is considered close to PC and has some corruption charges, perhaps the PM thought him the best choice as he proved that he can keep a secret and do as he is told. Patel, considered a Mukesh Ambani man, perhaps wanted to ensure that the sops do not go to the needy and make it easy for Modi to come back to power in 2019.
Expect the money to flow from RBI. The government may want to spend it on sops before the 2019 elections. We can understand it if this money is spent to re-capitalise say the top 10 healthy banks. Whether it is for sops to people or banks, only time will tell.
 RBI to pay Rs 50,000 cr dividend to govt for FY18, in line with Budget estimate – Aug 8, 2018, Economic Times
 RBI can transfer Rs.1-3L cr surplus to govt: Report – Nov 27, 2018, Times of India
 Demonetisation: Who knew? Modi’s black money move kept a closely guarded secret – Dec 9, 2016, India Today
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