V. Sridhar

A Budget That Throws the Railways Off the Tracks

The budget for 2024-25 completely ignores the crisis afflicting the Indian railways, undermines not just the efficiency of its operations or of safety, but thwarts the potential positive spinoffs that may have been available for the wider economy.

The sidelining of the Indian Railways, historically a part of the Indian budget-making process, is now complete. Finance minister Nirmala Sitharaman’s seventh edition of the budget is historic for not attempting even a token pretence of a reference to the Indian Railways in her presentation. Not even the spate of railway accidents since her last full-year budget has moved her. “Railways” figured just once in the entire speech – that too in relation to her general concern about infrastructure and industrial development.

One of the first steps initiated in this direction by the Narendra Modi government after assuming office in 2014 was to eliminate the practice of a separate budget. Ironically, the justification for this “smart” move – that this was a vestige of the colonial past – came from a political formation that singularly stood aside from the national independence movement.

The most striking aspect of the budget – in the context of the collapse of capital formation and investment in the wider economy – is that it utterly belies the expectation that there would be larger capital outlays. And, naturally, this is reflected in the continuing neglect of investment in the Indian Railways.

This is not some incidental expectation; it arises from the fact that the railways is the single largest Indian enterprise – private or government-owned – not just in terms of contribution to output or in terms of employment, but also because the scale and scope of its impact is unlike in any other activity.

In fact, a chief economic adviser to the Modi regime in its early days had pointed out that the multiplier effect works with a factor of five in the case of the railways – one rupee of investment in it generates activity that is five times greater.

One of the trademark features of budget-crafting in the Modi kaal – perfected by Arun Jaitley when he helmed the finance ministry – was to cynically undermine the sanctity of budgetary numbers. The trick was simply to promise a large-sounding number as an outlay, quietly slip it down in the revised figures presented the following year, and then tweak them even lower when the actuals arrived a couple of years later.

Bereft of media attention or scrutiny, the regime could bask immediately in the glow of a “massive” increase in outlay without delivering anything substantial at all. This tested model was applied to the railway finances.

Also read: On Board a ‘Ghulam Express’ of the Indian Railways

The capex mirage

Overall capital expenditure in the wider budget is projected to amount to a nice-sounding Rs 11,11,111 crore in 2024-25, but if the past is any guide, one can safely assume it would be lower when the next budget comes along. Here is why: the budget estimate of capex for 2023-24 was Rs 10 lakh crore but was revised to Rs 9.5 lakh crore and now, the latest “provisional revised” estimates place them even lower, at Rs 9.49 lakh crore.

In effect, between the budgetary promise of last year and what is estimated now, there is a slippage of 5%. But even more important, the increase between now and last year is just about 10%, barely enough to cover inflation. This approach to capex is mirrored in the way the needs of the railways have been addressed.

The capital outlay for the railways in 2023-24 was significantly higher than in the previous year, an increase of almost 51% over the previous year’s budgetary allocation. However, in the current fiscal year, 2024-25, the outlay has been increased to Rs 2.51 lakh crore — an increase of just about 5 per cent — not even enough to keep pace with inflation (see table).

This apparently sharp increase in the railways’ capex needs to be qualified on two counts. First, it happened after the complete collapse of investment during the pandemic; in effect, normalising the spike would have meant that there was nothing remarkable.

Second, this came after several years of waffling during which the Modi regime moved the goalposts for investments several times – first on account of its plans for the railways under the National Infrastructure Pipeline and then a National Rail Plan – promising investments over a stretched timescale, but which it never adhered to. This apparent one-year uptick in investment thus came after a prolonged period in which investment in critical infrastructure was strangled.

Fundamental crisis of network capacity

The fundamental constraint on the operations of the Indian Railways arises from the acute shortage of physical capacity, which has resulted in the severe congestion on the network. In several major trunk routes, tracks are handling capacities that are in excess of 140-150% of the rated capacity.

Investment in capital expenditures is thus urgently needed to resolve this capacity constraint. The neglect of capital investments has meant that the shortage of railway network capacity has been snowballing into the (emphasis added) fundamental constraint on the operations of the Indian railways under the watch of the Modi regime. In fact, this is essentially what is at play, creating the systemic risks that lurk behind the issue of safety in the railways’ operations.

Over the years, as the network has become more congested – caused by more and frequent trains, a widening mix of different kinds of trains with varying speeds running on the same tracks – the needs of maintaining train operations and traffic requirements have dictated terms that are ever in danger of running afoul of normative safety standards (by the way, very well-defined in the Indian Railways’ rulebooks and manuals).

Also read: Five Reasons Why the Indian Railways Have Gone Off-Track

Indeed, the recent preliminary report of the chief commissioner of railway safety (CRS) on the June 17 accident involving a passenger train and a goods train near New Jalpaiguri is absolutely on point here, remarking that this was “an accident-in-waiting”. As we have seen after every accident, Kavach has been waved as a magic wand that would usher in an amrit kaal of sorts for railway safety, but there is nothing – absolutely nothing – in the budget for this grand pipe dream of a project.

The capacity constraint that has built up over the last decade has arisen from the systematic neglect of investment in the railways. Soon after Modi made the grandiose announcement of the Infrastructure Pipeline in 2015 from the ramparts of the Red Fort, it became clear that the money it was allocating was nowhere near what it said it was committed to.

The annual shortfall in the railways’ component in the first four years of the NIP from 2015-16 were 45%, 35%, 22% and 15%. These were to be made in critical areas that would have augmented network capacity, modernised equipment and made for more efficient train operations, apart from crucially adding an additional margin of safety to the operations of the railways.

As the accompanying charts and tables show, investments in each of the areas – signalling, track renewal (a euphemism for the replacement of ageing track assets), track doubling and the special railway safety scheme that is named the RRSK (Rashtriya Rail Sanraksha Kosh) – allocations have either not been consistent or kept pace with normative requirements set by this government.

Added to this have been two additional layers of complexity, arising entirely from the Modi regime’s uniquely whimsical method of functioning (see charts on safety-related investments and outcomes).

Skewed priorities, overloaded capacity

First, it turns out that the increase in outlays for 2023-24, which appear to flatter at first sight, have actually arisen from the way the regime has painted itself into a corner.

Given the Modi regime’s first instinct to leave things to the market, it was natural that it banked on mobilising capital from sources other than its own coffers via the budgetary process. In doing this it relied on the Indian Railway Finance Corporation (IRFC) to fund its rolling stock acquisition programme, via leases. It also had an abiding faith in Public Private Partnerships (PPP); it waited in vain for several years before giving up on this front as well.

The other sources of funds were from internal resources of the railways, but because the operational surplus was too meagre, nothing much came of it. The spike of 2023-24 thus came when the government ran out of options. The IRFC could no longer lease because its balance sheet was stretched; the government also found interest payments for leased assets was mounting.

In fact, what happened in 2023-24 was simply a rearrangement of the sources of funding, not a significant additional increase in capex for the railways. In effect, if one aggregates internal resources, funding from IRFC, expected investments in PPP and funding from other institutional sources of funding, all of which had not materialised, and substitute them with budgetary allocations that were made, the increase would be just about a paltry Rs 15,000 crore.

The much-needed additionality in investments to free capacity never materialised and continues to add even more bottlenecks for the movement of passenger and freight traffic and for safety.

But, bad as this was, things have been worsened by the whimsical arrangement of priorities in the overall constrained environment. This relates to the emphasis placed on select marquee projects – most notably the Vande Bharat trains or the over-the-top station beautification projects at arbitrarily select locations that cannot be justified by any objective criteria.

The misalignment of priorities has implied that roughly one-fifth of the allocations since 2022-23 have been earmarked for rolling stock acquisition. But the question to ask is: what is the point in adding more trains, locomotives and wagons when the track and trackside infrastructure they need to run along and the signals that guide them languish?

The introduction of the Vande Bharat trains, for instance, distorts the traffic priorities of the railways because they actually lower (emphasis added) the capacity of the network on which they run. This is because these faster trains require many other trains – which are slower, including the many goods trains – to be moved off the track when these fancier trains need the tracks for their runs.

Recall, the average speed of a passenger train on the Indian railways system is about 50 km/hr and the average speed of a goods train is just about 25 km/hr. It is also significant that the freight traffic is what earns net revenues for the railways. In effect, these marquee projects add several layers of complexity to a system that is already creaking.

One had almost given up hope that this government would do anything meaningful by way of actually making investments to solve the capacity constraint that is choking the railways. A possibility for hope emerged with the elections, in the expectation that the limited mandate may force the regime to change course, if not make a U-turn. Nirmala Sitharaman’s latest salvo has emphatically ruled out any such possibility.

Table by author.

V. Sridhar is a journalist based in Bengaluru.

Cover Your Tracks: The Modi Government’s Attitude After the Balasore Tragedy

In a cynical attempt to avoid culpability for one of India’s worst-ever rail disasters at Balasore, the Modi government is peddling conspiracy theories.

The conduct of the minister of railways in the aftermath of one of the biggest railway disasters in the history of the Indian Railways, near Balasore on June 2, has been shocking in more ways than one. In particular, the unprecedented decision of the ministry, supposedly upon the recommendation of the Railway Board, to initiate a probe by the Central Bureau of Investigation (CBI), is highly irregular and is at variance with longstanding established procedures and practices in the case of accidents in the Railways.

This deviation appears to indicate a desperate attempt at damage limitation that has two facets: one, to limit the damage to the political authority embodied in Narendra Modi the prime minister because, after all, after the spate of Vande Bharat inaugurations he is now seen as the face of the Railways in popular perception; and, two, to ring fence the impact of this particular accident so that longstanding issues of a systemic nature in the Railways, which have a bearing on safety, are diverted from public attention that has been riveted on the Railways after the tragedy at Balasore that has cost nearly 300 lives.

It appears that railway minister Ashwini Vaishnaw has already determined not only how the accident happened but identified the persons suspected of having sabotaged the signalling system, which triggered the accident that involved three trains. The fact that the CBI commenced its probe even before the Commission of Railway Safety (CRS), the statutory authority empowered to probe all rail accidents resulting in loss of lives, had even finished its first round of hearings at Kharagpur, is shocking.

The CRS’s proceedings, which commenced on June 5, were conducted by A.M. Chowdhury, Commissioner of Railway Safety, South Eastern Circle. The CRS also visited the accident site on June 6. Summons were issued to at least 40 named Railway staff and even some contract workers who may have been working at the site prior to the accident; several more were called upon to depose before the inquiry, among them were members of the Railway Protection Force and members of the National Disaster Response Force in Odisha. In keeping with its track record of similar investigations in the past, the CRS also invited members of the public or “any other relevant witness” to be present at the inquiry. The CRS, it needs to be reiterated, works under the administrative control of the Ministry of Civil Aviation. This decision was made even before Independence, when it was known as the Railway Inspectorate, in order to ensure the autonomy of the investigating agency.

Undermining the railway safety commission

On June 4, less than 48 hours after the accident, Vaishnaw claimed that a “change made in the electronic interlocking and point machine” had caused the accident. He also misleadingly announced that the CRS “has investigated the matter”. Most significantly, he claimed, “We have identified the cause of the incident and people responsible for it. It happened due to a change in electronic interlocking.” To clarify, it is a matter of public record that the CRS’s notice for its inquiry proceedings was made only on June 4, announcing that the proceedings were scheduled for June 5 and 6 and would continue “till completion”. At the time of writing, the inquiry is by no means over. It is well known that the CRS generally commences its official inquiry only after a couple days, allowing for relief and recovery activities to proceed immediately after an accident. According to a CRS circular issued in December 2012, a “brief preliminary narrative report” and “provisional findings” are to be submitted by the investigating zonal safety commissioner to the Railways Board, the Chief Commissioner of Railway Safety and the concerned zonal railway entity within 30 days of the accident. The circular also stipulates that the preliminary report be sent to the Press Information Bureau for wider dissemination. The detailed report is to be submitted within 180 days. The Railway Board is required to respond with its “action taken” report within 270 days.

Also read: Coromandel Express Back on Tracks, But Systemic Risks Remain

A senior retired Railway official told The Wire that media reports of the findings of a “preliminary” enquiry, conducted internally by the Railways, are a far cry from the statutory inquiry conducted by the CRS. He also pointed out that media reports about the railway ministry “directing” or “initiating” an inquiry by the CRS suggest “extreme ignorance” about the functioning of the CRS. “Nobody can direct or ask the CRS to conduct an inquiry, it is a key statutory function assigned to it by law,” he pointed out. The fact that it functions under the civil aviation ministry underlines its independence from the institution it is expected to investigate, he added. “The Railway Board recommending a CBI investigation is something that has never happened before,” he observed.

A former member of the Railway Board who served for four decades in the Railways told The Wire that unlike in the past, this inquiry was not preceded by extensive advertisements in the media, inviting the active participation of the public in its proceedings. Taking serious exception to the CBI probe, he pointed out that both the railway minister and Prime Minister Narendra Modi had promised “strict action” against the culprits who caused the action, after which Vaishnaw announced dramatically that the culprit had been identified. “If the culprit has already been identified, even before the cause of the accident has been established beyond doubt, why does the CBI have to probe any further?” He also pointed out that the CRS is staffed by personnel whose “competence” in all aspects of the Railways’ functioning is well established, which “the CBI is unlikely to have”.

An advantage of an inquiry by the CRS is that it provides a comprehensive assessment of the safety situation in all its dimensions. This implies that the Railways can draw lessons and implement corrective measures that prevent similar accidents from recurring. In contrast, the CBI’s probe would be limited to this one case, and confined to identifying the “culprits”, if any. There would be no systemic lessons to be learnt. Indeed, that may well be the motive for calling upon it to investigate this accident.

A desperate conspiracy theory

Vaishnaw has claimed that the Coromandel Express, which was on the “Up” line, entered the adjacent loop line on which a stationary goods train was standing, despite having a clear signal to proceed straight ahead on the main line. Further, he claimed that the point which had been set for allowing the train to proceed on the main line had been tampered with, implying that someone had switched the point in order to cause the accident. This line of argument, essentially a conspiracy theory, is what he used to justify his decision to order a CBI probe.

There are several problems with this line of reasoning. First, when did the goods train that was standing on the loop line at the time of the accident pass through the point? Was the point switched back for the Coromandel Express? If so, when? A railway employee who has worked with the organisation for more than three decades told The Wire that it is unlikely that the goods train would have entered the loop line much before the ill-fated train arrived. Given that the route is a heavily congested one, and given that slower trains are assigned lower priority so that the faster trains move on the main line, it is likely that the goods train would have entered the loop just before the Coromandel Express arrived. If so, was the point switched back after the goods train had moved fully on to the loop line? If indeed so, when was this done? And, even more importantly, was the point functioning properly at that time?

Ashwini Vaishnaw. Photo: Twitter/@BJP4India

The railway employee cited earlier said the interlocking system that governs the switching of points on the tracks have to satisfy three conditions before a train is allowed to pass through a signal. First, just before the train arrives at a station the gatekeeper at the level-crossing and the station master (or his deputy) exchange a signal that confirms that the gate has indeed been closed. Only after this confirmation is the point set to either the main line or the loop line, depending on the traffic requirements at that time. In addition, a third condition needs to be satisfied before the signal can turn green for the next train: the switching of the point to either the main or loop line is only possible if there is no obstruction on the track for which the green signal is given. “If the track is occupied, the signal cannot turn green because the point cannot be set for a train to move on an occupied track,” explained the employee.

Ashok Kumar (name changed because the union activist fears victimisation), a signalling inspector in the Railways, told The Wire that the “tampering” of the point that has been alleged by the minister is “extremely unlikely, simply because there would have been very little time for someone to plan and execute this”. Typically, a signal from the preceding station conveys to the Station Master that the train had passed through it. The Station Master at Bahanaga Bazar Station (near which the accident occurred) would then ensure that the point is set in the direction in which is meant to be. Kumar also pointed out that the interlocking switch, once set, cannot be altered for at least two minutes. We know that the Coromandel Express that day was traveling at 128 km/hr. We also know that the distance between the previous station, Panpana PH, and Bahanaga Bazar, is five km. A train travelling at that speed would have travelled that distance in about 141 seconds – actually less, because the accident site is just before Bahanaga Bazar Station. This implies that the person who deliberately reversed the point would have had less than 20 seconds to do it.

Moreover, Kumar explains that for this to happen, there would have to be collusion by the Station Master or his deputy. He asks: “But even more importantly, even if the point was reversed, how could the signal have turned green to allow the Coromandel Express to the loop line when there was an obstruction (the goods train) on the tracks?”

Sidelining safety

Recent revelations about a similar incident on February 8 indicate that a head-on collision between the Sampark Kranti Express and a goods train in the Mysuru section was prevented only because of the “alertness of the Loco pilot”. A communication from the South Western Railway Headquarters pointed out that the relevant point was “automatically set in the wrong direction”. It observed that the event “indicates that there are serious flaws in the system, where the route of despatch gets altered after a train starts on signals with correct appearance of route in the SMs (Station Master’s) panel.” It observed that the incident is in contravention of “the essence and basic principles of Inter-locking”. The incident highlights the fact that electronic signalling equipment has malfunctioned in the recent past.

In the community of railwaypersons, it is well known that those on the operational and commercial side of operations call the shots, while those on the engineering side, whose task it is to keep the system fit and ship-shape, only get what is given. In heavily congested railway corridors like the one on which the Coromandel Express was travelling – characterised by not just high passenger traffic but also of goods, particularly coal and iron ore – those on the engineering side have to bargain hard to get adequate time to conduct the regular repair or maintenance work. In railway parlance, the “block” time they get is often a fraction of what is required. Kumar points out that typically if the time needed is 90 minutes, railway staff get just about 20 minutes to complete the work. “The bosses are extremely averse to delay traffic, even if it actually compromises safety,” he said. “The subordination of those who work to ensure safe operations, to those whose task is to maximise revenues, is a serious anomaly, and this has only worsened in recent years.”

On June 6, the Railway Board, convened by its chairperson and CEO Anil Kumar Lahoti via video conference, urged senior officers urged to spend “quality time” with field staff over the next two weeks to ensure that “systems” are followed correctly. The Board also decided, like so many times in the past, that scheduled “block” times are provided for, “without any uncertainty.” The meeting also promised field staff at the lower levels that they need not be afraid of delaying trains if there were safety concerns. In fact, the Board said it would reward them for doing so.

A railway employee familiar with the accident location told The Wire that there appears to have been some point-related wiring work done near the accident site just before the collision on June 2. Normally, after completion of the work, this would require testing involving at least two persons at the point, an electronic signal maintainer (ESM) and an assistant, working in tandem with the station master to check physically and visually whether the point is in fact working properly after the repair work had been completed. In reality, however, the scarcity of working staff and the time constraints result in serious compromises with safety norms, he explained.

According to the Railway Board, there were 8,747 accidents arising from “equipment failure” in 2021-22, of which 2,592 were due to “failure of signalling apparatus”, accounting for almost one-third of all cases of equipment failure. Although these accidents did not results in fatalities, the fact is that they point to problems that need urgent attention. To add to the picture of neglect, there are now 14,850 vacancies in the Signalling Department of the Indian Railways.

A recent article by Sarabjit Arjan Singh, a senior retired railway official and a member of the Central Administrative Tribunal, illustrates these constraints. The severe shortage of personnel and adequate time to conduct maintenance work results in the station master and the staff entering into an “informal understanding” because the Railways’ “central control is extremely reluctant to agree to blocks (of time)”. He suggests that supervisory staff who oversee track, rolling stock and signalling equipment must determine when it is safe for a train to pass through, instead of leaving it to those who manage the commercial side of operations, whose primary motive is to move more traffic faster on the track.

Gross underinvestment

The Modi government’s penchant for glitz, reflected in Modi’s eagerness to inaugurate every Vande Bharat train route, as well as his promise of Bullet Trains, has come at a heavy cost. Modi’s fondness for appropriately-Bharatiya sounding fancy new names resulted in the Rashtriya Rail Sanraksha Kosh (RRSK), a fund exclusively meant for improving the railways’ safety systems.

The railways had recommended an allocation of Rs 1.19 lakh crore over a five-year period, starting in 2017-18. With the Railway Budget banished on utterly specious grounds that year, the allocation was trimmed to Rs 1 lakh crore. In reality, over the five-year period, the shortfall of financial allocation for the RRSK was about 25%. In the seven years of its life, it has received Rs 96,000 core. The programme has now been extended for another five years, but with additional allocations of just Rs 45,000 crore. Thus, over a ten-year period, allocations would amount to Rs 1.41 lakh crore, not just barely enough to cover the increase in costs estimated in 2017-18 but also not reflecting the backlog of track renewal, signalling and other works that require serious attention, and funds.

Significantly, the total allocations for signalling and telecom works under the RRSK have received just a little under Rs 10,500 crore in seven years. How adequate is this? According to an internal Task Force Report on Safety (not available in the public domain) submitted by a team of senior railway officials in early 2017, in the wake of a spate of accidents and derailments, the backlog of existing signalling systems at that time amounted to Rs 7,800 crore, “leave(ing) aside investments in Advanced Signalling Systems”. Similarly, the current backlog of track renewals, a euphemism for tracks that require replacement because they have outlived their life, amounts to almost 10,000 km, about 8% of the Indian rail network. Although allocations for track renewal have improved in the last few years, the neglect in the Piyush Goyal and Suresh Prabhu years leaves a lot of catching up to do. Meanwhile, the backlog is building up. This has also to do with the heavy flogging of assets caused by the heavily-overladen wagons on Indian Railways, which reduces the life of the rolling stock as well as the tracks they ride on.

The tragedy at Balasore is a wake-up call for the Modi government to change course from the excessive focus on the glitz and instead focus on ordinary necessities that remain unseen, but are a matter of life and death.

V. Sridhar is a journalist based in Bengaluru.

Withdrawal of Rs 2,000 Note Shows India Is Still Feeling Effects of Modi’s Tughlaqian Demonetisation

The RBI appears to admit, without any embarrassment whatsoever, that once the purpose of inflating the value of currency in circulation has been served, there is no further need for the denomination.

That the gaudy pink unwanted child, born out of the whimsical demonetisation of high-value currencies in November 2016, would have to die early was always expected. Indeed, when the Reserve Bank of India (RBI) matter-of-factly announced through a press release on May 19 that it had initiated a time table for the withdrawal of the Rs 2,000 currency note from circulation, it only served as a reminder, yet again, that the effects of Prime Minister Narendra Modi’s Tughlaqian adventure linger on for far longer than most people had imagined.

The RBI announced on May 19 that it intends to phase out of circulation the Rs 2,000 note, the aesthetically ugly pink currency note that nobody wanted to own. The central bank admitted that the currency note, an aberration in the denominational structure of the Indian currency regime, was only introduced to facilitate the “expeditious” expansion of the value of currency in circulation after demonetisation. The note was introduced because of the sudden evisceration of more than 86% of value of all currency in circulation in the economy, following the withdrawal of the Rs 500 and Rs 1,000 notes.

The RBI appears to admit, without any embarrassment whatsoever, that once the purpose of inflating the value of currency in circulation has been served, there is no further need for the denomination. Indeed, no denomination in the history of the Indian currency regime would have had as short a life as the Rs 2,000 note. In essence, the latest move confirms yet again the debauchery of the national currency in 2016.

The RBI said 89% of these banknotes were issued before March 2017. What the central bank forgot to mention was that by March 2017, the Rs 2,000 note accounted for a whopping 50% of the value of all currency in circulation, indicating just how hopelessly warped the rupee’s denominational structure had become as a result of demonetisation.

Ironically, RBI governor Shaktikanta Das, who served as secretary, economic affairs, when demonetisation happened, and who in that role was not particularly forthcoming with facts about the extent of remonetisation, addressed a press conference on May 22 to clear lingering doubts about the latest move. For someone who heads the institution that is in charge of the country’s currency management, his admission that the primary purpose of the Rs 2,000 note was to “quickly replenish” the void caused by the withdrawal of the Rs 500 and Rs 1,000 notes was startling but not surprising. Whether the national currency can be trifled with in this manner is an obvious question that comes to mind. Das reaffirmed that the pink note remains “legal tender”. However, whether the local tea vendor would be willing to accept it is not something that the central bank can enforce at the point of transaction.

Currency as a lubricant of exchange

Why is the denominational structure important in any currency regime? To appreciate just how the prestige of the national currency has been trifled with, one needs to understand the purpose of money in a modern economy. To reiterate what basic economics tells us: money functions as a medium of exchange and as a store of value; it is also a unit of account, enabling economic participants to compare relative prices, but this is not of immediate concern in the context of demonetisation.

Superficially, an economy may appear to provide several options for facilitating exchange, but other payment methods — credit cards or even the now-ubiquitous Unified Payment Interface, for instance — cannot act as a store of value. Any transaction requires two parties to agree on the terms of exchange, normally facilitated by a currency or a mode that is acceptable to both. We have all been through situations when one or another party is either unable or unwilling to accept a particular currency denomination or a form of payment, a particular option on the UPI platform, for instance. Multiply this on a vast scale — which is what happened on after November 8, 2016 — and you are guaranteed chaos on a gigantic scale that freezes the economy.

In its role as a facilitator of exchange, money, as expressed in its currency avatar, needs to act in a stable and predictable manner. That is, its acceptance must be universal and guaranteed to succeed in every instance of exchange. Failure can have only one result: a gridlock that throws sand in the wheels of the market. More importantly, a currency’s role as a stable medium for facilitating the circulation of goods and services — the very meaning of economic activity — is seriously compromised. This has serious and real-life consequences for the economy and livelihoods, as the nation experienced painfully after November 2016. Indeed, a regime that is agnostic to the mode of payment is ideal because it allows for the smoothest exchange of goods and services in an economy. The dim-witted notion that the state ought to privilege one form of payment over another is unacceptable because it erects barriers and introduces rigidities that prevent smooth exchange.

The RBI’s declaration that the Rs 2,000 note will continue as “legal tender” is meaningless if economic agents feel that it is not safe tender. It is not difficult to visualise how this will unfold between now and September. In particular, citizens’ lack of trust in the validity or stability of the currency regime, based on their lived experience since 2016, would render the declaration meaningless. What matters to citizens on a here-and-now basis is whether the pink note will be accepted by counterparties for transactions they wish to initiate.

Also read: Who Is the Complicated Process to Hand in Rs 2,000 Notes Meant to Target?

Moreover, since everyone is aware that these notes can only be exchanged or deposited in banks till September 30, 2023, they would be unwilling to be the one to undergo the pain and cost of having to surrender them at a bank before that date. Instead, they would be inclined to simply refuse to accept transactions executed with those notes. The needless limit of 10 notes per visit to the bank adds another additional layer of deterrence. Effectively, the RBI has only succeeded in creating another needless logjam which hinders the circulation of goods and services in the economy.

And, reminiscent of the 2016 disaster, this time too confusion reigns. Even before the deposit of Rs 2,000 notes could commence on May 23, banks, among them the biggest, the State Bank of India, announced that customers need not fill up forms in order to deposit their notes. Significantly, the central bank, in whose name the national currency is managed, chose to remain silent. However, the bizarre limit of 10 notes per trip to the bank remains. The ostensible claim that this would reduce pressure on banks is illogical. Pray, how would multiple trips to the banks by a holder of these notes reduce “pressure” on the banks? To be sure, bank staff, who suffered enormously in the months after November 2016 — many died on the job — are in for another round of severe stress.

A short history of the short life of the pink note

The denominational hierarchy of currencies anywhere in the world is premised on the logic of ensuring maximum liquidity. Before demonetisation, the central pillar of the Indian currency regime was the Rs 500 note, much like the Rs 100 note was about two decades earlier, reflecting a lower general price level in the economy as well as its smaller size then. The Rs 500 note accounted for almost half of the entire value of currency in circulation; together the Rs 500 and Rs 1,000 notes accounted for 86.4% of the value of currency; and along with the Rs 100 note, the three denominations accounted for almost all the value — 96%. The RBI now says that the share of the Rs 2,000 notes in total value of currency in circulation has dwindled to just 10.8%; by last March, the Rs 500 note’s share was almost three-fourth of the value of all currency in circulation. The withdrawal of the Rs 2,000 only means that its share would rise even higher, warping the currency regime even further.

The hierarchy was based on a logic. Notice that before demonetisation the distance in monetary value between the highest denomination and the next in the hierarchy was exactly double. The introduction of the Rs 2,000 note — and the elimination of the Rs 1,000 note — increased the distance between the two highest denominations to four times. This immediately implies that although the Rs 2,000 note acts as a store of higher value, its liquidity is drastically diminished. This is exactly why people have shunned it throughout its short life. Indeed, at the height of the crisis in 2016, the driver of a van carrying currency notes in Bengaluru hijacked the vehicle but abandoned it after realising that it was carrying only the new pink notes!

As the distance in monetary value between the two top currencies in the hierarchy widened from twice to four times, the pressure on the Rs 500 rupee note mounted because a large proportion of these notes were merely supporting the illiquid Rs 2,000 note. That is, instead of being readily available for transactions, a significant proportion of the Rs 500 notes were merely present in order to facilitate the circulation of the Rs 2,000 note. Obviously, one could not carry a Rs 2,000 note without necessarily carrying other denominations, particularly the Rs 500 note. This the primary reason why nobody wanted to hold the new highest denomination note.

Also read: Rs 2,000 Banknotes and the Mysteries of This Mini-Demonetisation

In the denomination scheme that existed before demonetisation, the Rs 500 note was the main pillar because it not only provided immediately available liquidity but was available on call as a store of value. In that scheme the Rs 1,000 note acted as a vehicle for relatively high-value transactions. But note that relatively high-value does not necessarily mean well-heeled holders of the currency. Give that about half of India’s national income is generated by informal activity, a relatively high-value transaction does not necessarily mean the participants have high incomes or are wealthy.

Just take the case of a fertiliser dealer — and that would be a good example to cite because the sowing season is just round the corner (it is noteworthy that the 2016 demonetisation happened just after the harvest operations) — selling di-ammonium phosphate in a rural or semi-urban setting. A dealer selling about 25 bags (50 kg each) a day would have a turnover of Rs 30,000, but the dealer’s profit would only be a small faction of this turnover. The assumption that these notes are evidence of ill-gotten wealth reveals not just ignorance about the nature of the economy but a callous disregard for elementary principles of currency management.

It is obvious that the idea of the Rs 2,000 note had nothing to do with any principles of currency management; instead, it was simply meant to address the immediate crisis. In effect, the new denomination’s sole purpose was to address the production problem of printing new notes in order to quickly inflate the value of currency in circulation. That this was done without any respect for the longstanding principles governing the hierarchy of denominations was shocking.

As a result of this desperate flogging of the currency presses, the value of Rs 2,000 notes accounted for more than half of all currency in circulation by March 2017. What happened in the case of the Rs 2,000 note was also replicated in the case of the Rs 200 note, albeit on a much smaller case. Quite apart from the 200 being an odd denomination in the world of currencies, this too was guided purely by the objective of scaling up liquidity quickly while providing some support to the overburdened Rs 500. The number of Rs 2,000s in circulation peaked in 2018, at about 336.3 crore (3.363 billion), but between then and March 2022 more than one-third of these notes were withdrawn.

The RBI’s recent statement justifies the withdrawal of the Rs 2,000 note, claiming that its Clean Notes Policy requires it to phase out notes that have outlived their four-five year lifespan. If that was indeed so, why did it have to phase out such a large proportion of these notes well before they needed to be extinguished? In any case, the Clean Note Policy has nothing to do with the utility of the denomination; if it did indeed serve a purpose, all that the RBI needed to do was replace old notes with new ones.

A self-inflicted liquidity crisis

The sudden evaporation of value of currency in circulation in November 2016 resulted in the unprecedented collapse of liquidity. This self-inflicted crisis was unlike anything thew world had ever seen. It required the RBI to run its currency printing presses at full tilt. But even this was not enough, simply because their capacity was not meant to address such a massive collapse of liquidity. The production of the gaudy pink note was given priority — Indians would recall that the Rs 500 note was nowhere to be seen in the immediate months after demonetisation. The extent of the liquidity collapse can be gauged from the fact that the value of currency in circulation at the end of March 2017, four months after the disaster, was actually 20% lower than a year earlier. Shockingly, in end-March 2018, the value of currency in circulation was just about 10% higher than two years earlier — much lower than what a growing economy would have required or what inflation rates would have dictated.

Also read: Rs 2000 Note Withdrawn: Policymaking That Is Insensitive to Consequences Has Become the Norm

The withdrawal of the Rs 2,000 note was preordained. It is also a reminder that the effects of demonetisation are not over yet. Indeed, if anything, there is a greater need now for the return of the Rs 1,000 note. Given the increase in the price level and the expansion of the economy, however anaemic, there is an urgent need to provide support to the Rs 500 note, especially for relatively high-value transactions. But who is to tell the Modi acolytes that relatively high-value transactions does not automatically mean the transactions of the elite and their ill-gotten wealth. Only the cussed refusal to see reason and logic explains the unwillingness to bring back the Rs 1,000 note. In fact, even if one accepted the logic that high-value notes were synonymous with black money, how did it make sense to introduce a denomination with an even higher value in 2016?

Economists like Prabhat Patnaik, Pronab Sen, Arun Kumar and Jayati Ghosh have repeatedly pointed out for years that black money is not a stock but a flow. Just as capital seeks ever-wider realms in search of greater returns, so would ill-gotten wealth that basically arises from evasion of not just taxes but from the overstatement of business costs and understatement of incomes. If that is so, it makes sense to not just heighten scrutiny of businesses where black money is being generated, instead of trying to catch it after it has been allowed to escape the arm of the law. To focus on cash and go hunting for high denomination notes, assuming them to be the manifestation of black money, is thus not just silly, but results in the victimisation of an entire people.

One of the less appreciated aspects of demonetisation was the fact that it facilitated the transfer of wealth from the poor to the rich on a scale that would not have been normally possible. This was achieved because of its differential impact; it was not scale-neutral in its impact; the small suffered much more and many were wiped out as a result. In hindsight, the demonetisation of 2016 was just the first of a triple whammy that has hit India’s most vulnerable repeatedly.

Every instance of demonetisation in history — and there have been very few of them — has been made in a country hit by hyperinflation. No country staking claims to a seat at the high table, and certainly not one whose leadership never tires of boasting that it is one of the world’s largest, has ever deigned to have achieved anything by using demonetisation as an economic policy tool. In fact, no standard textbook on economics cares to even make a passing reference to demonetisation. Modi thought otherwise, and the country paid a very heavy price.

The same sections that were hit hard by demonetisation, in particular small and informal businesses in both urban as well as rural areas, were hit again, first as a result of the imposition of the Goods and Services Tax in 2017 and since 2020, as a result of the pandemic. The K-shaped growth of the Indian economy, one in which a thin sliver of society is doing very well, even as livelihoods of most Indians have turned significantly worse, is testimony to the widening inequality. Demonetisation was thus the harbinger of the forced immiseration of the Indian people. And it remains a work in progress.

V. Sridhar is a journalist based in Bengaluru.