Published: Wed, September 06, 2017
Economy | By Guillermo Lane

Warned government about cost of demonetisation, former RBI governor Raghuram Rajan says

Warned government about cost of demonetisation, former RBI governor Raghuram Rajan says

Slamming the government over the move, Raghuram Rajan said that he had already warned the government about the short-term costs of demonetisation outweighing the long-term profits.

Finally speaking his mind out in his yet to be released book - I Do What I Do: On Reforms Rhetoric and Resolve - Rajan claims that he had earlier given an oral suggestions in February 2016 and also submitted a note highlighting the required steps along with needed time if the government plans to carry on with demonetisation move. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them and there were potentially better alternatives to achieve the main goals.

Rajan, demitted office on September 3 past year, precisely 35 days before PM announced for demonetization of rupees 1000 and 500 bank notes. This book is the compilation of speeches delivered by him as RBI Governor.

There were innumerable speculations on the preparations for demonetisation exercise, and in fact, some ministers even stated at that point of time that spadework had started months before Prime Minister Narendra Modi made the surprise announcement on 8 November 2016. "I gave my views on demonetisation orally".

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He said, "At no point during my term was the RBI asked to make a decision on demonetization". He replied that holders of unaccounted wealth find ways to divide their hoard into many smaller pieces, and much of this is typically in the form of gold, making it harder to track.

According to a report in the Reuters, Rajan had clearly said that demonetisation had a disruptive impact on the economy.

"I think all said and done, it would be fair to say the intent was good. I made these views known in uncertain terms", Rajan wrote.

Separately, in an interview to Economic Times, Rajan said demonetisation has had the largest impact on the people who transact informally, of which many might be very poor. Let us not mince words about it - GDP has suffered. Frequent changes in cash withdrawal rules added to chaos and inconvenience that lasted far longer than the 50 days the PM had sought to restore normalcy. "The estimates I have seen range from 1 to 2 percentage points, and that's a lot of money - over Rs 2 lakh crore and maybe approaching Rs 2.5 lakh crore". But RBI data, available now, shows 99% of the Rs 15.46 lakh crore worth high value notes have returned to the banking system, meaning hoarders of black money found a way to legitimise most of their dodgy cash.

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