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you would like to see in any such exercise is that the day you do it you should be ready to replace all the currency withdrawn.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
