Former RBI governor Raghuram Rajan has said that he made it quite clear to the government that demonetisation was “not a good idea” and that its implementation was “not well-planned” since 87.5% of the currency was being demonetised.
On November 8, 2016, the Centre banned ₹500 and ₹1,000 notes.
Speaking at the Harvard Kennedy School in Cambridge on April 11, Mr. Rajan rejected the claim that the Reserve Bank of India was not consulted by the government before it went ahead with the demonetisation. He, however, reiterated that the move to cancel 87.5% of the currency value was “not a good idea”.
“I didn’t ever say that I wasn’t consulted [on demonetisation]. In fact, I have made it quite clear that we were consulted and we didn’t think it was a good idea,” said Mr. Rajan who is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business.
'Not a useful exercise'
He said demonetisation “was not a well-planned, well thought-out, useful exercise and I told the government that when the idea was first mooted”.
Any macro-economist would say that if 87.5% of the currency is being demonetised, then it better be made sure that a similar amount of currency is printed and ready to be put back in circulation.
“India went into it without having done that. It had a negative economic impact but also the idea was that somehow people who had money stored in their basements without having paid taxes on it would overnight see reason and come to the government and say ‘sorry we were hiding this stuff, let me pay taxes on it’,” Mr. Rajan said, calling it a “naive view”.
“Anybody who knows India, knows that very quickly we find ways around the system,” he said, adding that with “essentially” all the money that was demonetised coming back into the system, the exercise did not have the direct effect that was sought. While the longer term impact of demonetisation was yet to be seen, its negative economic impact included people not having currency, not being able to pay and economic activity plummeting especially in the informal sector.