Raghuram Rajan Interview on Demonetisation

Raghuram Rajan speaks on demonetisation, economy and life after RBI:

Text of interview:-

Raghuram Rajan talks to Hindustan Times on his new book – I do what I do – in which he has said neither he nor the RBI under his watch favoured demonetisation.

Economist and former RBI governor Raghuram Rajan speaks about
1.impact of demonetisation,
2.the benefits of GST, Indians’ knack for ‘jugaad’ and working on building a liberal arts university in India.

Q: Many congratulations on your new book. Already a lot of debate has been generated, specifically on demonetisation. I know you want to talk about a lot of things, but a few questions that still remain unanswered...
A: That will remain unanswered.

Q. You have talked about an RBI note to government on the preparations and the time required for demonetisation. Can you share the details?
A. I have a duty not to reveal specific communications. Let me step back from whatever note was given and not represent what was said there. As a monetary economist, what you would like to see in any such exercise is that the day you do it you should be ready to replace all the currency withdrawn. We have seen the cash demand is now tapering off, but you should have been ready with that sort of cash on the day we did it. The less you are ready, the more you have to print in order to roll out the currency, the more economic life is disrupted.

Q: We saw the cash situation getting somewhat normalised around end of March. You are suggesting that’s the kind of time the government should have kept in mind.
A: Exactly. Remember that RBI mints and government mints were working double pace, triple pace, over this period. So that time was compressed relative to what would have happened hadn’t there been this sense of emergency.

Q: Were there ways to prevent some of the people who held illegal cash but managed to put it into the system?
A. I think one could have thought of and figure out ways to prevent that, perhaps. But human ingenuity is pretty significant in India. We are a very clever people, especially I think when it comes to jugaad. The real question you have to ask is how easy is it to prevent all this? And if it’s not, what is the amount you are going to cash in through this process.

Q. Some learning would come.
A. Some learning would come. You would figure that there are loopholes you would try and close. That goes with the territory of it being new--I don’t want to opine on that particularly.

Q. You said there were other alternatives to achieve the goals of demonetisation. What could have been those alternatives?
A. First, the intent of getting greater tax compliance is important, worthwhile, noble intent. How do you do that? In the longer run you may want to deal with the stock, but it is also as important to deal with the flow. You want to create much less incentive to create the black money and much less ability to hide the money that comes. One way is to reduce the space in the financial sector for hiding this black money -- for example, seeding all deposit accounts with Aadhaar, which the government is doing.

Q. You necessarily don’t need a move like demonetisation to achieve this.
A. I think if you are dealing with the flows, then you don’t need to work on the stock as much.

Q. This addresses the stock question primarily. And there also we haven’t’ seen much of success…
A. We have to wait and see what the Income Tax Department does with this kind of information about where the money has come in, into which accounts. Now given that an amnesty scheme was also proposed and the money came in despite that amnesty scheme, presumably some amount of hiding has gone on. That is not as obvious as you see the money in the account and the fellow confesses that this was all illegal money. So some effort will be required.
The other thing is how much can it withstand co

Steve Forbes on Demonetization

.“India has committed a massive theft of people’s property – a shocking move for a democratically elected government”: Steve Forbes on Demonetization

.“India has committed a massive theft of people’s property – a shocking move for a democratically elected government”: Steve Forbes on Demonetization

Steve Forbes, the Editor-in-Chief of Forbes magazine sharply attacked Indian government’s demonetisation move stating ‘what they have done to the money is sickening and immoral’.

An article written by Forbes in the magazine labeled the government’s decision as ‘massive theft of people’s property’.

Forbes called the Indian bureaucracy to be ‘notorious’ for corruption. In the article, Forbes has given an overview on how the demonetization move was carried out by the Indian government; about the cash crunch, ATM queues, and the increase in governmental control over lives.

Forbes even went on to compare the decision with former Prime Minister Indira Gandhi’s infamous sterilization program in the 1970’s, calling it Nazi-like eugenics. Forbes wrote: “Not since India’s short-lived forced-sterilization program in the 1970s–this bout of Nazi-like eugenics was instituted to deal with the country’s “overpopulation” has the government engaged in something so immoral.”

Forbes also wrote about how businesses are closing as companies are not able to pay their employees.

Forbes also condemned the excessive rules and taxes imposed by the Indian government, which he says is the reason of the informal operation of a cash-based economy.

“Just a currency change cannot stop terrorists from committing evil acts of terror,” said Forbes on terrorism.

“It will happen in a free market one way or the other, but it needs time,” said Forbes on digitization.

“India should get rid of such a complex tax system, which is the main reason for tax evasion.

Forbes suggestion for India should slash income and business tax rates and simplify the whole tax structure;

make the rupee as powerful as the Swiss franc; hack away at regulations…,” Forbes suggested.

“India is the most extreme and destructive example of the anti-cash fad currently sweeping governments and the economics profession.”

•7. The marked difference

•There was a marked difference in the approach of the Prime Minister and his opponents. The Prime Minister was being futuristic, and thinking of a more modern, technology driven cleaner economy. He is now speaking of cleaning the political funding systems. His opponents want a cash dominated, cash generating and cash exchange system to continue. The difference between Prime Minister Narendra Modi and Rahul Gandhi was clear - the Prime Minister was thinking of the next generation while Rahul Gandhi was only looking at how to disrupt the next Session of Parliament

•6. The Opposition

•There was no social unrest while implementing such a major decision. All opinion polls conducted by independent media organizations have shown that an overwhelmingly large percentage of people have supported the Government’s decision. The opposition disrupted a full Session of Parliament. Their protests have been ineffective. Their exaggerated claims on the disruption of the economy have proved wrong. It is a tragedy that a national party like the Congress decided to adopt a political position, opposing both technology, change and reforms. It sided with black money friendly status quo.

•5. The situation today

•The period of pain and inconveniences is getting over. Economic activity is being restored. The banks today admittedly have a lot more money available in order to lend for growth. Since this money constitutes low cost deposits with the banks, it is bound to bring down the rate of interest. Both these things have already happened. Lakhs of crores, which were floating in the market as lose currency, have now entered the banking system. Not only has the money lost is anonymity, it’s owners, after being taxed, are entitled to put it to more effective uses. The size of the banking transactions and consequently the size of the economy is bound to increase. In the medium and long run, the GDP would be bigger and cleaner. Money entering into the banking system and officially transacted would give an ample scope for higher taxation – both direct and indirect. The Centre and the State Governments would both stand to gain. The economy would also be serviced by both cash and highly digitized transactions.

•4. The magnitude of the decision

•The Prime Minister’s decision to replace the high denominational currency and eventually demonetise it required both courage and stamina. The implementation of the decision carried pain. It can lead to short term criticism and inconveniences. Drop in economic activity on account of the currency squeeze during the remonetisation period would have a transient impact on the economy. The decision involves high level of secrecy and printing substantial amounts of paper currency, distribution through banks, post offices, banking mitras and ATMs.

•The fact that large quantum of high denominational currency has been deposited with the banks does not render this money to be legitimate cash. Black money does not change its colour merely because it is deposited in bank. On the contrary, it loses its anonymity and can now be identified with its owner. The Revenue Department would thus be entitled to tax this money. In any case, the amendment to the Income Tax Act itself provides that the said money, if voluntarily declared or if involuntarily detected, would be liable for differential and high rates of taxation and penalty.

•3. The adverse consequences of Cash

•Paper currency is a zero interest anonymous bearer bond. It has no name or history attached to it. Crime can take place with or without cash but excessive cash as a medium of exchange is favoured by the underground economy. It results in non-compliance in the matters of tax payments which creates an unjust enrichment in favour of the evader as against the poor and the deprived. Mountains of cash money reach tax havens through the hawala route from the original paper currency. Cash facilitates real time untraceable payments. Cash is the medium which funds bribery, corruption, counterfeit currency and terrorism. Ethical and developed societies aided by technology have consistently moved towards banking and digital transactions as against the excessive use of cash. Paper currency opens the doors for many vices. When Governments are able to collect more tax from tax evaders, they are in a better position to collect less tax from everyone else. Reducing cash may not eliminate crime and terrorism but it can inflict serious blow on them. States have shown that the stores of cash do not disappear on their own till Governments take active steps to reduce the quantum of paper currency.