SOME OF THOSE gathered at the Union Cabinet meeting on the evening of November 8th were cracking their knuckles in anxiety; a few others were fidgety; others were hiding their apprehensions behind calm faces. Sports Minister Vijay Goel took a shot at levity by narrating funny incidents to the minister seated by his side, who was stealing glances at the clock on the wall. It was three minutes to 7 pm.

Members of the Cabinet had received a prior advisory not to get mobile phones to this extraordinary meeting, heightening the tension. None wanted to be the first to hazard a guess at the agenda, although some surmised that it had to do with terror attacks, border conflicts and ceasefire violations. At 7 pm sharp, Prime Minister Narendra Modi made an entry and gestured the gathering to silence. “I have an important announcement to make,” he declared. The Prime Minister told them that the lengthening shadow of black money and corruption had started to eclipse India’s growth story and damage the country’s image abroad. There was urgent need for decisive action. He spelt out some figures and then dropped the bombshell: all Rs 500 and Rs 1,000 notes would cease to be legal tender within a few hours, at midnight. The public would be allowed to change old notes to newly issued Rs 500 and Rs 2,000 currency notes up till December 30th at banks. A national address would be made on television. He told his colleagues that unlike in 1978, when the then Prime Minister Morarji Desai took the decision by himself, he had decided to take the Cabinet into confidence on the issue. The Prime Minister said that the gathered ministers could ask Finance Minister Arun Jaitley for any clarifications they needed. Minister of Mines Narendra Singh Tomar let out a laugh, high pitched and nervous. Some could be heard sucking their breaths in. Only one minister had questions. Apart from Jaitley, all of them were taken completely aback. From his chair, the Prime Minister studied the reaction on each face intently.

It was almost 8 pm and the Prime Minister was scheduled to make a nationwide address on the Cabinet decision on Doordarshan in Hindi as well as English. Women and Child Affairs Minister Maneka Gandhi asked if she could be excused after the first televised speech, in Hindi, but was asked to stay on until the entire exercise was over. Only Home Minister Rajnath Singh and National Security Adviser Ajit Doval were allowed to exit after the first address, having sought prior permission. At precisely 8 pm, the special broadcast was set up.

It was an hour after the Cabinet meeting that Modi went on air to announce the decision. Each and every one of the Rs 500 and Rs 1,000 currency notes that citizens held with them had been demonetised and would cease to be legal tender from midnight, he explained in his address. Exhorting the public not to panic since they would have time till December 30th to exchange their old notes for new, the Prime Minister sought their support for this all-out war against black money that he had declared to strengthen the economy and the country. There would be some pain, he said, but it would only be for the wider social good and a patriotic cause.

It was a short address. But its effect was electrifying.

JUST TWO DAYS prior to the Cabinet meeting, on November 6th, the Reserve Bank of India (RBI) had set off a series of coordinated actions that prepared the stage for the Prime Minister’s November 8th announcement. It had shot off a classified communication to the heads of currency divisions in banks across the country. They were to present themselves at the headquarters on the morning of November 8th. Once there, they were each charged with well-secured currency chests. Within lay wads of the newly printed Rs 2,000 currency notes to be released by banks to the public on November 10th. Within also lay the new Rs 500 currency. Sworn to secrecy, they were allowed to open the chests only after the RBI gave them a green signal that evening. That all-important okay came soon after Modi’s announcement to the nation.

Also summoned to an emergency meeting at the RBI headquarters that evening were bank chairpersons. When it started at 7 pm that evening, most of those present had no clue of the core agenda. For a while, they mooted other matters of concern with RBI officials. At the appointed moment, breaking into a discussion on such issues as the Scheme for Sustainable Structuring of Stressed Assets, the RBI officials in attendance switched on TV screens, gesturing to the chiefs to watch the Prime Minister’s address.

A nation struck numb would wake up to the brunt of this ‘inconvenience’ the next morning. Phones rang off their hooks non-stop at North Block. It was time for the Prime Minister and his team to enlist citizens for the war on illegitimately held cash. Two days later, Modi took his mission statement and message to Ghazipur in Uttar Pradesh.

In retrospect, the Cabinet ministers should have had a hint of the impending ‘surgical strike’ on high-value currency notes. After all, the Government had signalled its determination to push this through in many ways over the past several months. Despite the high level of secrecy, news of a fresh Rs 2,000 currency note to be issued had leaked to sections of the press from Hyderabad, where they were being printed. However, few figured out the larger plan.

Secrecy was crucial to the success of the idea to turn Rs 500 and Rs 1,000 currency notes invalid as legal tender. According to reports, the design of the new notes, including the depiction of Modi-era achievements such as the Mangalayaan satellite, was finalised and the process of printing started three months ago, though in as hush-hush a manner as possible.

An aggregate Rs 16.4 lakh crore worth of notes are estimated to be in the economy’s circulation, of which the banned denominations account for around 86 per cent by value. According to RBI data, that is a total of some Rs 14.2 lakh crore, of which Rs 500 notes account for nearly Rs 7.9 lakh crore and Rs 1,000 notes add up to a little more than Rs 6.3 lakh crore. Compared with this, Rs 100 currency and notes of lower denomination add up to only around Rs 2.2 lakh crore. This meant that the impact on the ordinary citizen would be palpable.



Secrecy was imperative for the move’s success. People in the know of Modi’s move included Arun Jaitley, senior officials in the PMO and Finance Ministry, then RBI Governor Raghuram Rajan, and other senior central bankers Share this on

What made the battle all the more grave was the alarming increase of the now-invalidated bank notes in recent years. According to the Finance Ministry, bank notes, the primary fuel of the economy, had increased 40 per cent in the period between 2011 and 2016. The quantum of Rs 500 notes increased 76 per cent and Rs 1,000 notes went up 109 per cent. India, among the world’s top cash-using economies, has grown increasingly dependent on high-value currency for two main reasons. One, inflation has necessitated higher value notes for buying the same quantity of goods one could buy for much less earlier. Two, the influx and stranglehold of black money in the economy has grown enormously, symbolised mainly by the demand for high denomination notes. Most economists are of the view that this increased cash circulation has led to greater inequity in society. And this was at the core of the Government’s pitch to people at large.

By December 30th, the deadline spelt out for exchange, the Government estimated that conservatively, around 80-85 per cent of the total high-value notes would be mopped up by banks. By day four, banks had collected close to Rs 3 lakh crore worth of these. By November 15th, that figure had zoomed up to an estimated Rs 5 lakh crore.

But the most telling indication of all that Modi was determined to set the pace for a low-cash economy came from his interest in the progress of the Pradhan Mantri Jan Dhan Yojana (PMJDY) . The PMJDY was designed to exponentially expand financial inclusion countrywide, especially for the marginalised, the below-poverty-line groups, the urban poor and the agricultural labour community. This flagship programme of the Modi Government, it now appears, was a significant foundation laid for demonetisation.

The PMJDY’s rapidly climbing numbers were proof of the urgency invested by the Government in the programme. By May 2016, it had as many as 219 million bank accounts. To inculcate the financial ethos of routinely engaging with bank processes among the target audience, the Government linked these accounts to substantive health insurance benefits. All subsidies to the eligible would be delivered through Aadhaar numbers registered for these accounts. This included payments under the MGNREGA scheme, SC/ST provisions, student scholarships and the NOAPS under which destitute senior citizens are given a monthly pension.

By November this year, the number of bank accounts had shot up to 254.5 million, of which 150 million are urban and another 100 million are rural bank accounts. The number of ‘zero balance’ accounts has dropped to 23.4 per cent of the total. Drafting the poor and marginalised into the banking system was also done through post offices and through 200,000 banking correspondents.

The Government had thus set the stage for the dramatic make over of the humble post office. At the end of 2014, the Modi Government amended the Post Office Savings Bank General Rules, 1981, to allow select branches—of the 150,000 post offices—to issue ATM cards to savings bank account holders. It also allowed the post offices to issue account statements (rather than passbooks).

Simultaneously, Modi pushed for the Unique Aadhaar number’s connectivity (orphaned by the UPA regime) to all bank accounts to plug leaks, increase transparency and allow the well-targeted transfer of government subsidies to those eligible. In mid-September, an official memo of the Finance Ministry reiterated that the deadline for the end of voluntary declaration of undisclosed income by citizens—the Income Declaration Scheme—was September 30th. In effect, there would be no more extensions of the deadline and any attempt by anyone to declare untaxed income after this date would face penalties under the law. It was in this context that the Prime Minister had on November 8th declared that any wealth from undeclared sources of income kept in the form of high-value notes would become “worthless pieces of paper” by midnight. Cash from legitimate earnings could, of course, be exchanged at banks until year-end.

Modi’s move on demonetisation comes on the eve of bypolls in states like Assam and West Bengal. Following later would be assembly elections in Uttar Pradesh, Punjab and other states Share this on

On its part, the central bank too had issued notices that could’ve been read as hints that a move of this kind may be in the offing. In the last week of October, it cautioned banks on its website against counterfeit notes, especially in Rs 100 currency. It asked banks to double-check the authenticity of these notes before re-circulating them. In the first week of November, it directed banks to offload more Rs 100 notes, something it had already done in May.

Thus far, only 3.5 billion pieces of the new Rs 2,000 note (around half the number of Rs 1,000 currency in circulation) and far fewer of the new Rs 500 notes have been printed, say reports. Given the short-term shortage of smaller value notes, the Government was aware that there was need to tread carefully and actively enlist the support of all classes of citizens for the drive. Among those who were fielded on this front were Jaitley and Rajnath Singh. But it was understood that the mission’s success would rest solely on the Prime Minister himself.

OF THE Rs 16.4 lakh crore in circulation, some experts estimate that a maximum of around 12-14 per cent could account for untaxed money and counterfeit notes, just a part of the huge shadow economy that dominates the country, the rest having been converted to real estate, gemstone and gold assets and stowed away in classified Swiss bank accounts. However, most economists agree that Modi’s decision would definitely draw in whatever black money is stored in the form of high-value currency, wipe out counterfeit notes, and make future black money operations extremely expensive. “A start had to be made on this front and there was need to take the public, especially the honest and the hardworking, fully on board. This was the best place to start,” said Jaitley. The second phase of the attack would follow later, on benami property, bullion and jewellery, the ‘usual suspect’ sectors for black money to be channelled into. Also, what would follow would be a big strike on political funding, particularly for elections.

Secrecy was imperative for the move’s success. Keeping the information classified from his own Cabinet, therefore, could not have been easy for Modi. People in the know included Jaitley, senior officials in the PMO, the Finance Ministry, then RBI Governor Raghuram Rajan, and other senior officers of that institution.

A CROWDED CLUSTER of bylanes with the overpowering aroma of chhole bhature outlets. They jostle with fruit juice stalls vending suspicious liquids with which to wash down heavy lunches on dizzy afternoons. The place, a veritable maze of alleys and old constructions, is choc-o-bloc with tiny offices of one kind or another. This is Daryaganj, home to all manner of eateries and printing presses to milliners to faux jewellery units and shoe shops. It’s the nerve centre of Old Delhi’s business district.

Somewhere on the main road is the 70-plus-years-old Golcha Cinema. At the stroke of the lunch hour on sweaty summer days in this neighbourhood, the staffers of these cramped cubicles prise themselves off their stools and struggle for the exits. Among them is a bespectacled data entry operator—let’s call him Bhushan—who spends his work day bent over a computer, crunching numbers, whose innocuous demeanour belies his importance to wealthy people who’ve stashed away bags of unlawfully earned money. Bhushan and others of his ilk are actually chartered accountants who secretly operate as middlemen for ‘clients’ looking to launder their money for a price. In return for a commission of around 1-2 per cent of the sum in need of a wash, they use multiple bank accounts and companies to park the untaxed funds of their clients for a required period. Turned ‘white’ or legal, the money is returned to clients through cheques. The entry operator raises bogus bills to cover his commission—which could be quite substantial, depending on the sum that has to be converted from black to white—and the relationship, always confidential, lasts for prolonged periods of mutual back-scratching.

Most economists are of the view that increased cash circulation has led to greater inequity in society. And this was at the core of the Government’s pitch to people at large Share this on

Bhushan would have remained incognito for longer, except for the IT Department raids launched by the Government as part of its countrywide drive to nab big-ticket black marketers, not just in metros but in tier-two and three towns where a good part of daily business is run on the ‘kuchcha’ or untaxed funds. Those raids were on overdrive through the first half of this year even as the officially offered voluntary income disclosure scheme for tax evaders was threatening to yield unsatisfactory results.

In determined swoops on establishments throughout the country to ferret out black money, the IT Department had increased its raids by mid 2016 to three times (145) the number of raids the previous year (55). Between April and July, the Department had seized Rs 245 crore in unaccounted-for money. The total undisclosed income admitted during the raids, as reported by the Times of India, was a huge Rs 3,375 crore, excluding cash and jewellery seizures. Officials acknowledged at the time that the raids had been ‘highly successful’ and led to ‘unprecedented’ cash seizures from builders in the real estate sector and educational institutions across Chennai, Mumbai and Delhi. These were two sectors commonly acknowledged as being hubs for money laundering.

Based on information gathered in Mumbai, Delhi, Chennai, Kanpur, Lucknow, Moradabad, Bhopal, Hyderabad and other towns, the IT Department began working on around 9 million transactions, including multiple deposits of over Rs 10 lakh in bank accounts and property purchases in excess of Rs 30 lakh.

Bhushan was among those interrogated by the IT officials on a raid overdrive. Among the names thrown up on the suspects list was an anchor at NDTV . The news anchor, who is currently being probed by IT officials on the source of his money, had apparently acquired an expensive home in New Delhi’s diplomatic area of Chanakyapuri. The matter is being probed and the anchor has already been summoned thrice for questioning by IT officials.

In the course of its raids, the Department identified close to 700,000 ‘high risk’ persons whose travel and business operations were put to scrutiny. The activities of these red-flagged names are likely to be monitored by officials for a while now, as part of the clampdown on black money.

The information gathered from Bhushan and others in his trade is now the basis of a comprehensive and fresh nationwide databank of black money suspects. Of particular interest to the IT Department are the names of those who have used the Old Delhi laundromat recurrently to legalise their money. Today, the list is in the hands of around 1,000 supervisory officers of the rank of commissioner and above who have been charged with ferreting out black money trails by grilling suspects.

The decision is also expected to nullify all the counterfeit currency in circulation, much of which is said to fund terror activities in sensitive states such as Kashmir, besides the drug economy in Punjab Share this on

The Department is also keeping close track of all Jan Dhan accounts. Several accounts have popped up in which the top limit of Rs 50,000 for cash deposits has already been reached, which has led to the conclusion that these are being used to launder black money.

That the dragnets being cast far and wide by the Government have sent shivers down the spines of habitual offenders is beyond doubt. The first few days after Modi’s November 8th announcement saw several establishments in key business areas pull down their shutters, perhaps in apprehension of IT raids.

Modi’s war on black money dovetails his party’s message of ‘India First’ with the commitment to uproot graft . It is a powerful political message. It offers a tangible stake to ordinary Indians in this national mission. The message is: ‘If you are an honest Indian who loves his country, you will support me in this all-out battle to cleanse the political and economic system.’ So says an image analyst who has worked on political campaigns.

For Modi, it is part of India’s ongoing battle against its enemies, both internal and external. It’s a battle that taps into the prevailing nationalist sentiment in the wake of the Pathankot and Uri attacks. “It’s the metaphorical version of the ‘Uncle Sam Wants You’ message. In this emblematic war, each and every honest and patriotic Indian is a soldier participating in the frontline directly,” says the image analyst.

The decision is also expected to nullify all the counterfeit currency in circulation, much of which is said to fund terror activities in sensitive states such as Kashmir, besides the drug economy in Punjab, a state due for Assembly polls. Also targeted are ‘extortion’ funds that grease the Maoist machinery in states such as Jharkhand and Chhattisgarh. The war is simultaneously being waged against money illegally ‘earned’ as commissions and kickbacks for ‘clinching’ deals in various sectors by entrenched lobbyists. A big chunk of the fake currency being stamped out has, according to the Home and Finance ministries, been printed in Pakistan and pushed into the Indian economy through porous borders with Nepal and Bangladesh.

There have been apprehensions even within Modi’s own Bharatiya Janata Party on whether this ‘big political risk’ he has taken could alienate the powerful trading community.

Many merchants have traditionally maintained ‘pucca’ account books in parallel with ledgers for ‘kuchcha’ deals that are kept out of the official tax grid’s lenses. This vote base has stuck steadfastly with the BJP through thick and thin since its Jan Sangh days.

Says a social scientist, “In a rapidly transforming economy, Modi is attempting to forge a longer term political bond for the party with the massive aspirational class of youth who are growing restive with widespread corruption hampering their opportunities. This would include the new retail trade classes that inhabit massive emerging spaces both physically and online. He is redefining the demographic [framework] by tapping the fast growing socio-economically aspirational classes. The old trading community vote base, too, many among the party leadership contend, would have little option but to fall in line even as it modernises, since the BJP continues to be the political outfit that best protects their interests.”

The move has made black money much harder now to generate, and to that extent the aspirational youth across classes are looking forward to fresh opportunities in the economy. The redeeming outcome would be to make the Indian economy significantly less cash-oriented. Economists have for long argued that a cashless economy is not only far safer, it is also fairer to various strata of society. In the longer term, that too, should make for a political statement that favours the Indian citizen of limited means—be it the vegetable vendor, the street hawker, the marginal farmer, the daily wager, or the landless farm worker.

Before going public, Modi told his colleagues that unlike in 1978 when Morarji Desai took the decision by himself, he had decided to take the Cabinet into confidence on the issue Share this on

“EVERY LEGISLATOR begins his career standing on the foundation of a certain falsehood: the fallacious statement on election expenses that he files,” former Prime Minister AB Vajpayee once said. In its efforts to check the rise of illegal money in polls, the Election Commission has been raising the expense limits allowed to candidates regularly. In 2014, the EC had set a limit of Rs 70 lakh in expenditure for each party representative contesting a Parliamentary seat. For assembly elections, the average limit for a candidate is currently Rs 27 lakh per constituency for big states; it ceiling is Rs 20 lakh for smaller states and Union Territories. In reality, no one follows this.

In 2015, the Association of Democratic Reforms (ADR) published a report that said that 75 per cent of the funding of key political parties originates from unknown sources. Of all the known sources, 87 per cent of donations came from corporates.

The biggest victim of rampant black money is democracy itself. Illegal money delegitimises so-called ‘popular choices’. Distributing liquor used to be a mainstay of some parties, but now, it has gone far beyond that with few blinking even as laptops, motorbikes, tablet computers, mixer-grinders and expenses borne for daughters’ weddings are used as tools to lure voters into backing a particular political party.

Although lobbying among Parliamentarians or elected representatives is not legal in India, as it is in the US, analysts say that surreptitious funding of political parties for future gains through favours has left the door wide open for corruption.

Modi’s move on demonetisation comes on the eve of bypolls in some states. Following later would be key assembly elections in UP, Punjab and other states. The move effectively puts paid to efforts by various political parties to use hoarded funds in Rs 1,000 and Rs 500 currency notes to influence voters. Most parties in the fray start accumulating slush funds well before election week in order to lay the ground for vote bank manipulation. “Given this, the move by Prime Minister Modi is a significant start to checking the flow of these funds,” says another analyst. According to him, electoral politics, Bollywood, real estate, gold and the jewellery sectors, apart from education, are the ones where black money mostly finds its way and thrives.

Electoral politics is an obvious target. One small way around the EC spending limits for assembly polls, for example, is the use of a few dummy candidates. Plus, there are expenses on canvassing by various wings of the particular party, such as its students and women’s organisations. Other expenditure includes vehicles for travel and helicopters for the real candidate, poll booth and canvassing offices, election day expenses, and, the biggest chunk of all, cash for ‘influencing voters’ and buying the loyalty of vote bank delivery agents. Some experts peg the sum needed at around Rs 10 crore, way over the official level permissible.

The EC rules require parties sponsoring candidates to maintain day-to-day accounts of all election campaign expenses and submit these to it within 90 days of a Lok Sabha election and 75 days of an assembly one. Also, it has set up an expansive Election Expenditure Monetary System mechanism to curb the influence of money power in polls. First implemented in 2010 in Bihar and subsequently in the 2014 General Election, this system’s rules require each contestant to keep a separate bank account for all poll-related expenditure and to pay for expenses incurred only through cheques or bank drafts. In addition, the system has a complaint-monitoring cell set up in every district, with quick response teams and other surveillance bodies available to act if need be. These teams are entrusted with the task of tracking illegal cash transactions or any distribution of liquor and other items for vote inducement.

“Just the rent for a chair at a public meeting costs Rs 10-15 daily, festoons cost Rs 300-500 apiece, helicopter rides cost upward or Rs 3 lakh an hour. How can any of these arrangements, all necessary to run a basic election campaign, ever succeed without exceeding the expense limit set by the Government?” argues an MLA of UP. Just halfway into the poll season of 2014, the EC seized Rs 219 crore in cash, enough to fund 500 primary schools in a state for a whole year, according to one news report. That gives some indication of the extent of slush funds being used for electoral politics in India, the extent of Modi’s challenge against black money here.

In an interview in 2014, former EC Commissioner SY Quraishi , talking about his book The Undocumented Wonder: The Making of the Great Indian Election, outlined 40 ways by which political parties circumvent strictures against use of unlawful funds in elections to influence voters. Paying utility bills for voters, forking out big-value currency notes for liquor, transporting money in ambulances to distant regions for distribution and tying up with local vendors for the provision of free booze were some of these. “There are at least 40 such ways [in which] political parties play cat and mouse games with the ECI,” Quraishi said at the time. Independent audits of the accounts of political parties and their poll spends, he held, should be made mandatory and the vetted figures should be put up on official party websites.

Meanwhile, the opposition, stirred up by the issue of demonetisation, is expected to stall Parliamentary proceedings in the ongoing Winter Session. Congress leader Rahul Gandhi, who queued up at an ATM in Mumbai, has sought to blame Modi. “None of the Prime Minister’s industrialist friends are seen toiling in long queues outside banks or ATMs for cash… Are you seeing any suit-boot person standing in line? These are just ordinary people,” said Rahul Gandhi.

Virginia University Professor John Echeverri-Gent, who has done a study on election funding in India, argues that the Nehru-Gandhi family maintained its supremacy within the Congress party thanks to its control over election funds. Amid attacks from opposition parties such as the Congress, the Prime Minister, though, has won the support of Nitish Kumar, chief minister of Bihar and JD-U leader, who lauded the move to get rid of “fake notes”.

According to a 2015 study, black money was both ‘systematic and systemic’ in electoral politics, propped up by corrupt businessmen, politicians and executives.

Modi has reimagined freedom at midnight.