How RBI & Election Commission avoided an ugly confrontation

RBI's move to ease cash withdrawals in current accounts only helped avert a face-off with ECI

The Reserve Bank of India (RBI) decided to lift withdrawal limits on current accounts after a tense stand-off with the Election Commission of India (ECI). An escalation has been averted through deft manoeuvering and restraint by both institutions.

The stand-off happened because the ECI’s efforts to monitor election spending would have been hampered with the RBI’s continued restrictions on cash withdrawal limits. The ECI had introduced new rules in 2013 to improve monitoring of a candidates’ election expenses, largely incurred in cash. Through a notification issued on October 15, 2013, the ECI mandated all candidates to open separate bank accounts exclusively for the purposes of election expenditure. The account number would have to be communicated to the Returning Officer (RO) at the time of filing nomination by the candidate.

Before this notification, the candidates could have spent money from their own accounts. This rule allowed ECI to precisely monitor expenditure of candidates to ensure they spent within their limits. In the upcoming state elections in Uttar Pradesh, Uttarakhand and Punjab, candidates can deposit and spend no more than Rs 28 lakh from these accounts. In Goa and Manipur, a candidate’s deposit and spending limit is Rs 20 lakh.

Any expense exceeding Rs 20,000 would have to be made through cheque through this account. The ECI had even directed banks to facilitate opening of candidates accounts on a priority basis. The candidates would have to submit their respective statements to the commission within 30 days of the declaration of results.

The ECI while issuing these directions noted, “Candidates are spending excessive amounts in election campaigns, which disturbs the level playing field. They are not showing correct expenses in the day-to-day accounts of their election expenses. Therefore, for maintaining the purity of the election process, facilitating maintenance of correct accounts of election expenses by the candidates and also for their proper monitoring, the ECI instructs each candidate to open a separate bank account exclusively for the purpose of election expenditure.”
 
Since November 8, 2016 the RBI has been staggering Indians' access to their own cash to calibrate it with its capacity to remonetise the economy. Had the RBI not budged on withdrawing cash limits on current accounts, it could have upset ECI’s election expense monitoring mechanism. By doing so, RBI could have potentially violated Article 324 of the Indian Constitution. Article 324 vests the superintendence, direction and control of all elections with the Election Commission.

The RBI avoided this conflict by keeping withdrawal limits on savings bank accounts while removing them on current accounts. The ECI then issued instructions to all candidates to open current accounts. These accounts are usually used by businesses and traders rather than regular savers or the salaried class. By selectively lifting withdrawal limits, the RBI may have averted a conflict situation with ECI, but questions have been raised over the preferential relaxation in withdrawal limits for politicians even as a majority of Indians still operate within limits set by the central bank.

RBI data suggests that there are 53 million current accounts in India. The number of savings accounts in India stands at 1.2 billion. Clearly, the RBI’s directive following ECI’s insistence, benefits a smaller minority while a majority of the country continues to be uncertain about cash availability. Current accounts constitute just 4% of the total accounts in the country.

This also indicates the RBI’s discomfort with the pace of remonetisation of the economy. The RBI has till now refused to disclose how much money has come back in the form of demonetised notes or the amount of new currency it has released to banks. Almost three months after demonetisation, the currency with public is less than half of what it was before it. On October 28, the currency with the public stood at Rs 17 lakh crore. On January 6, the currency with the public was down to Rs 8 lakh crore.

The total notes in circulation was a bit more at Rs 8.7 lakh crore. That’s again less than half of what it was pre-demonetisation.

Given that the government has been promoting cashless transactions and mobile wallets, the ECI could have urged candidates to switch to such forms to reduce reliance on cash during elections. This would have created problems in the poll bound hill state of Uttarakhand and north eastern state of Manipur where cash is still the preferred mode of transacting. This could have also militated against the ECI’s efforts to monitor bank accounts for election expenditure, especially given the logistical challenges of keeping a tab on multiple cashless transaction platforms.

Despite the government’s hard-sell, Indians have yet to come to terms with a less cash democracy.

In the end, both the RBI & ECI seemed to have managed to find a way out before things got ugly.