Constant Tinkering With Note Ban Rules Betrays Lack of Planning

Everything from the list of exempt transactions to exchange and withdrawal limits has been tweaked at least four times, all to address entirely foreseeable problems.

The constant tweaking of implementation policies does not suggest that the demonetisation was a well-planned government initiative. Credit: Reuters/Vivek Prakash/Files

The constant tweaking of implementation policies does not suggest that the demonetisation was a well-planned government initiative. Credit: Reuters/Vivek Prakash/Files

Since the demonetisation saga first began on November 8 with Prime Minister Narendra Modi’s speech announcing the withdrawal of Rs 500 and Rs 1000 notes, the rules for implementing the policy have been tweaked countless times. At first, S.O. 3407 (E) laid down the rules for depositing and exchanging the demonetised notes and set limits on how much people cash could withdraw from their bank accounts. Meanwhile, S.O. 3408(E) listed the kinds of transactions for which people could continue to use demonetised notes. Finally, S.O. 3409(E) introduced the new Rs 2,000 banknote as legal tender. These three notifications have since devolved into a confusing mass of ever-changing rules, conveyed to the public through a constant stream of amendments that reveal how ill-prepared the government was to implement this policy.

Confusion begins early

Every single one of the demonetisation-related notifications issued on November 8 had to be amended the very next day. For instance, the government initially announced that banks would have to submit reports listing the amount they held in demonetised notes. However, the government had to amend the order the next day to include the State Bank of India, cooperative banks and nationalised banks, something it had forgotten or neglected to do in its original announcement.

The government also realised that the new Rs 2,000 banknote had been notified under section 24(2) of the RBI Act rather than 24(1) which is the section that gives the Centre the authority to issue banknotes, and so this announcement had to be modified accordingly.

Ever expanding list of exemptions

It can be argued that the government’s policy is not a real demonetisation since the withdrawn notes can still be used for certain transactions specified by the government. This list of  permitted transactions stood at just eight on November 8, but was almost immediately expanded to include six more the next day, and has now more than doubled to about 20 types of transactions.

These exemptions were originally meant to last for just two days, but have also been extended thrice, the first time up to November 14 instead of the initially announced November 10, then up to November 24 and now finally until December 15.

Among other things, these amendments included permission to use old notes to pay for fuel and electricity. In these cases, the changes were so hastily drafted that further amendments were required to restrict these transactions to individuals and households and to ensure that public sector gas companies could also accept the demonetised bank notes.

However, after reports of people misusing these exemptions to launder money surfaced, the government limited the use of demonetised notes at petrol pumps and airline ticket counters to December 3, effectively reducing the previously announced December 15 deadline.

The frequent tweaking, even three weeks after the move was announced, clearly indicates that the question of which transactions ought to be exempted and for how long, was inadequately discussed and poorly articulated when the notifications were issued.

Changing rules for banks

The rules for the exchanging and depositing of demonetised notes have also been amended repeatedly.

The proposal to raise the limits on cash withdrawal from ATMs had to be scrapped because of the slow pace at which ATMs are being recalibrated to dispense the new notes. This indicates that the government vastly overestimated the speed with which the recalibration for the differently sized new notes could be achieved across the country.

It is also important to note that on July 20, 2016, the RBI reduced incentives for “ATMs dispensing lower denomination notes” in semi-urban and rural areas, lowering it to 60% reimbursement from the existing policy of 75%, as per a 2014 master circular. This move seems to be illogical if indeed the RBI had been preparing for demonetisation for a significant period of time before implementation.

The upper limit on how much money can be exchanged in a day has also changed frequently, going from Rs 4,000 to Rs 4,500 for about three days then dropping down to Rs 2,000 before the option to exchange money was removed altogether. Furthermore, the RBI notification telling banks to mark people’s fingers with indelible ink after exchanging money provoked a critical response from the Election Commission of India, providing more proof for the inadequate coordination that went into implementing the demonetisation.

Wedding exception blunders

On November 17, economic affairs secretary Shaktikanta Das told reporters that notwithstanding the limitations on the withdrawal of cash imposed following demonetisation, families would be allowed to withdraw up to Rs 2,50,000 for weddings. The next day after, the government issued a notification amending notification S.O. 3408(E) of November 8 which lays down the list of ‘exempt’ transactions for which the old demonetised notes can continue to be used to include wedding withdrawals. Realising its mistake, on November 19, the finance ministry rolled back the new provisions added in the wrong place. It then issued a fresh notification, also dated November 18, which amended the notification that actually dealt with withdrawal limitations. The clause added about weddings, however, specified that the withdrawals shall be subject to RBI guidelines, which remained elusive for another three days, resulting in dashed hopes for those trying to immediately avail of the wedding withdrawal exemption. On November 21, when the RBI did finally issue its own notification laying down the procedure, it included a condition stating that apart from the form for the withdrawal and identity proof, those withdrawing cash for wedding expenses will also need to submit a list of persons proposed to be paid in cash and as well as a declaration from those persons that they do not have bank accounts. This was diluted the very next day, by making the declaration requirement applicable only to proposed cash payments of more than Rs 10,000 to a single person. This continuous modification of the wedding withdrawal exception framework made this exception difficult, if not impossible, to avail for almost a week after its announcement.

Continuous tinkering indicates lack of planning

The cash required by farmers for purchasing seeds for the Rabi crop, the cash families need for weddings, the time taken for recalibrating ATMs and the possible misuse of the exempted transactions are all factors which should have been considered when the government discussed demonetisation. Most of the amendments to the original notifications have addressed easily foreseeable issues and the others have been aimed at fixing embarrassing errors made while drafting the original notifications. This continuous tinkering to fix avoidable or foreseeable problems suggests that the particulars of the demonetisation-related policies are being made on the fly rather than being meticulously planned in advance. Which provides a significant reason to doubt the finance minister’s bold claim that the implementation could not have gone better.

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