Demonetization: Manmohan rescues RBI Governor Urjit Patel as parl panel grills him

A former governor came to the rescue of the incumbent governor of Reserve Bank of India (RBI) here on Wednesday, who was facing a gruelling interrogation from MPs. The former governor was erstwhile prime minister Manmohan Singh. RBI Governor Urijit Patel was facing a gruelling interrogation by MPs while deposing before the 31-member Parliamentary Standing Committee on Finance, headed by Congress leader M Veerappa Moily.

Patel was summoned by the panel to reply questions on the demonetization of high-value notes and its impact.

Committee members of the Congress and Trinamool Congress (TMC) pointedly asked whose decision was it to withdraw high-value notes, and also about RBI's autonomy.

The also asked about the money that came back to the government during demonetization and the total amount of new notes of Rs 500 and Rs 2,000 that were sent to the banks. Incidentally, Singh, who had earlier described demonetization as a "monumental management failure," also raised questions on the issue.

The meeting was already in session when Patel arrived around 1.30 pm on Wednesday. Standing before the panel, he read a statement that lasted for 10 minutes, after which he questioned for nearly two hours. The meeting went on for four hours.

The RBI Governor's refusal to reply to a large number of questions drew the ire of Opposition MPs, who then asked him if he had compromised on the RBI's autonomy and if he had briefed the government about the impact of demonetization.

When the volley of questions failed to elicit a response, Singh stepped in, asking MPs to maintain decorum while dealing with the RBI Governor. Singh advised Patel not to reply to questions which were not in the agenda and could create problems for the bank. "Don't answer questions that would exacerbate problems for the central bank, whose autonomy has been depleted," the former PM was quoted as having told Patel.

That was not all. Sources said Singh asked Patel to jettison a question asked by an MP from his own party. The MP sought to know if there would be "chaos" if the existing restrictions on cash withdrawals are removed. "You should not reply to that query," the former PM counselled Patel.

Many Congress MPs were upset with Singh for supporting Patel. Earlier, while deposing before the committee, Patel said that demonetization discussions between the central bank and the government had begun early last year.

BJP members of the panel did not raise many questions. The RBI Governor was criticised for relinquishing RBI's autonomy and blindly following the Union Government's diktat.
The RBI was also criticised for failing to carry out the necessary checks ahead of banning currency notes. There have also been demands to know how much of the Rs 15.44 lakh crore in banned notes has returned to banks.

While refusing to quantify it, Patel is reported to have told the panel that Rs 9.2 lakh crore of new currency notes had been put into the system since November 8, - the day the PM announced demonetization. He said calculations were being done and could not give a timeline to the committee.

Sources said Patel quoted the figure even as TMC MP Saugata Roy rejected the claim. "The RBI Governor was unable to tell us how much money has come back to the banks, nor was he able to tell us when the system will be normal. The RBI officials were defensive," Roy said.

Patel's mention that demonetization started in January last year is an apparent contradiction of his earlier written response to the panel that the government "advised" the central bank to cancel high-denomination notes on November 7.

On Friday, he will meet another committee headed by KV Thomas of the Congress, who had controversially announced that, if needed, he would summon Prime Minister Narendra Modi as well.

This committee meeting would summon Patel again either during the Budget Session or after it as lots of questions from the members of this panel could not be answered for want of time.

Incidentally, the government has supplied all answers to the written queries by members of the Standing Committee of Finance. At this meeting, the RBI Governor also did not reply to a question as to when the situation would return to normal. He did not specify when the restrictions on the withdrawals would be lifted, saying "sooner than later."

He, however, insisted that the RBI's autonomy was not at all compromised while deciding and executing demonetization. He was quoted as asserting that "the Act that gives autonomy to the central bank had not been infringed."

On the question of demonetization, Patel had no hesitation in admitting the request had come legitimately from the Modi government. He was technically right as the government is empowered by the RBI Act to issue directions to the RBI under Section 7(1) while Section 24(2), which gives powers to demonetize specified bank notes, though only on the recommendation of the RBI's central board. The Act says: "The central government may, from time to time, give such directions to the Bank as it may, after consultation with the Governor, consider necessary in the public interest."