How Demonetisation Exposes The Fragility Of Our Institutions

Posted by Nikhil Kumar in Politics, Society
December 20, 2016

If in the long run we are the makers of our own fate, in the short run we are the captives of the ideas we have created.

– Friedrich A. Hayek (The Road To Serfdom)

Whether or not you support the government’s move to render the legal tender status of the old 500 and 1000 Rupee note, whether you have been positively or negatively impacted by the decision, whether you find economic logic in the decision, whether you think the implementation could have been better – you cannot afford to ignore the institutional deficiencies that this decision has brought to fore.

In the hyperbolic narrative around the decision, we have erroneously failed to recognise that the decision has manoeuvred around the institutions that have sustained us in these last seven decades.

The Executive:

Indian republic, being a parliamentary system, is run by the Union Cabinet which controls the executive government. The financial policies are, in general, decided by the finance minister. The Finance Minister keeps his colleagues informed about the affects of the policies on the ministries under their purview. All proposals relating to country’s finances are discussed in the cabinet at some stage. To be sure, the cabinet is never taken by surprise. This broadly defines the working precedent and practice of the government financial decision making.

According to a Reuters report, the Cabinet, much to their surprise, was informed of the decision to ‘demonetise’ shortly before the announcement was made on national TV. No report by the Niti Aayog or the Chief Economic Adviser was published to outline and detail the process. There was no economic analysis backing the move. But the PM was backed by an obedient cabinet without any known objection.

The Parliament:

The finances of the government and its fiscal policies are subject to Parliamentary approval. To be sure, the policies see the light of day as long as the government has a majority in the Parliament. A robust legislative process, however, is a prerequisite for effective law-making. In this instance, however, the government has ignored the Parliament by issuing an executive notification that, effectively, has ramifications for the finances of every household in the territory of India while it has no legislative backing of the Parliament.

Notwithstanding the above, the job of Parliament does not end at passing laws. Both houses of Parliament have a role to scrutinise rules made by the government under different laws. But the Parliament has been held handicapped, both by the government and the opposition, taking turns in ripping to shreds the very duties they have been sworn to serve. It has had no serious debate on the issue at all, let alone exercising scrutiny.

The Reserve Bank of India:

According to the RBI Act of 1934, the recommendation to render a certain currency denomination as invalid tender is made by the Central Board of the RBI. The chairman of its 4 regional boards is on the central board. Additionally, the Centre nominates 10 more directors on the Central Board.

The gazette notification that withdraws the legal tender status in the preamble states that the decision has been made on the recommendation of the Central Board of the RBI. Currently, the chairs of 3 of the 4 regional boards of the RBI is empty. Only 3 out of 10 nominee directors have been appointed. 1 position of Deputy Governor is still vacant. Thus, the RBI is operating with less than half of its board size; and less than a third of its size for independent members. A decision of such economic and social consequences was taken by a 10 member structure which should optimally be 21-strong.

In the bi-monthly policy review, the RBI governor conspicuously left unanswered the question of how the decision was reached by the Central Board – in light of the fact that the RBI mentions in its December policy statement that a fuller analysis of the impact on the economy is awaited. It seems bizarrely clear that the decision was merely rubber-stamped by the RBI in a hastily convened meeting with few chairs in occupation.


Much of the discussion in the TV studios has been restricted to the politics of the decision – the electoral consequences. The news presenters were brimming with excitement in the early days of the announcement, proclaiming with a sense of obedience that they had nothing to hide. They have taken utmost care not to appear opposed to this decision, questioning every opponent with the ferocity of a prosecutor while accommodating the presumably good intentions of the conformers.

Secrecy cannot be a foil for breaking down the governance structures. Everyday change in rules and regulations, contradictory statements by the RBI and the Ministry of Finance, changing of goalposts from black money and counterfeiting to digital economy – a naive go with the flow approach – betrays the fragility of our democratic institutions.

Any modern government, around the world, is run by rules and regulations along with a set of well-established traditions. Like it or not, they are there to keep the institutions of government protected from the whims and fancies of a political front. The precedent of an executive extra-legislative monetary-cum-fiscal policy that circumvents every democratic institution, to inflict itself upon a beleaguered citizenry – one that feeds itself on schadenfreude –  should send spasms of chills down our spines. We do, indeed, have a republic. The ubiquitous question is – can we keep it?

As Hayek had once written-

But while history runs its course, it is no history to us.