What is in a name? Withdrawal of Specified Bank Notes vs Demonetisation..

There is always this confusion about what to call the currency exercise of 2016.

The Parliament/media/experts call it demonetisation but the official notifications of Government/ RBI insist calling it  ‘Withdrawal of Specified Bank Notes ‘ and so on. The word demonetisation is not mentioned in official notices.

I somewhat got part of the answer from Jairam Ramesh’s book on the 1991 crisis- To the Brink and Back. It is a light account of the 1991 crisis explaining (but not emphasising) on the political negotiations behind the 1991 crisis. How the government sold the tricky changes to both within the party and the opposition. One wishes the account was longer but he just focuses on the first few months of the 1991 crisis,. But that would have taken the crispiness of the book. So it is a trade-off between a breezy read and elaborate one and the author has chosen the former.

In the book, he mentions how government and RBI went about devaluation in July 1991. Indian Government devalued the currency two times on 1 July 1991 and 3 July 1991. To keep the political pressures off, both the Government and RBI did not call it devaluation (pg 38):

Once the second devaluation was announced, markets reacted positively and industry circles also welcomed the move. But predictably the news caused a furore in the Parliament and great sullness within the Congress itself. The Finance Minister and RBI Governor, on their part, took great care never to use the word ‘devaluation’, always referring to it as ‘an adjustment if the exchange rate of the rupee’.

🙂

There you go.  It seems there is this thing called  political economy of terming policy actions to avoid dissent and controversy. You name it ambivalently but the objective is pretty clear.

Comparing it to 2016, one way to think is the purpose was to withdraw currency and not demonetise which means reduction of the currency in circulation. The 1978 ordinance was called The High Denomination Bank Notes (Demonetisation) Act, 1978. Thus both name and objective were clear. In 2016 it is called – The Specified Bank Notes (Cessation of Liabilities) Ordinance where things are ambivalent. Also, this time around there were multiple objectives as well like counterfeiting and terrorist financing as well.

However, the government clearly did not mean mere cancellation of liabilities. It obviously wanted to demonetise as well and hoped much of currency did not come back. There were many statements by the finance minister and other ministers which spoke about this objective. Some called it demonetisation as well. The unreturned currency could then be declared as black wealth and be celebrated as evidence of destruction of the same. RBI of course has been far more careful and has not uttered the word demonetisation at all.

So, in both 1991 and 2016 the prefix “de” was avoided to avoid dissent and keep off controversies. But the objective then was devaluation and this time one of them is demonetisation.

How these ideas/tricks keep coming around…

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