Ex-RBI governor warned Modi against demonetisation

Bloomberg

The man who predicted the 2008 global financial crisis also presaged the damage Prime Minister Narendra Modi’s unprecedented cash ban would cause to India’s economy.
Raghuram Rajan was governor of the Reserve Bank of India in February 2016, when he was asked by the government for his views
on demonetisation, according to Rajan’s book “I do what I do”, the first time he’s spoken about his experience in the country.
“Although there may be long-term benefits, I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals,” he wrote in the book. “I made these views known in no uncertain terms.”
The central bank then prepared a note outlining costs, benefits and other options available, as well as detailing the preparation that would be needed and the time it would require.
“The RBI flagged what would happen if preparation was inadequate,” Rajan said. “At no point during my term was the RBI asked to make a decision on demonetisation.”
Outspoken Behaviour
Rajan left the central bank last September after unnerving political leaders with his outspoken nature. Several months later, Modi blindsided the nation by scrapping 86 percent of currency in circulation, saying the move was essential to unearth unaccounted wealth and fight graft. Since then, speculation has raged over who thought up the policy, with the debate getting more divisive last week as a slew of data showed demonetization contributed to a growth slump without meeting its targets.
This wasn’t the first time that Rajan had warned against demonetisation. Back in 2014, when the matter hadn’t yet been broached by the government, he was asked at a public lecture for his views about invalidating currency bills. 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.
“It’s not that easy to flush out the black money,” Rajan had said, using the local term for cash stashed away illegally to avoid tax. He added that he’d rather focus on the incentives for black money, such as tax rates.
Modi’s government intially predicted about a third of the 15 trillion rupees invalidated wouldn’t be deposited into banks, indicating that while honest tax payers would line up to return their bank notes, others would prefer to give up their wealth rather than risk investigation. However, an RBI report said 99 percent of the bills had been returned.

Growth Slumped
Data the following day showed Indian growth slumped to the lowest since 2014 during April to June, supporting surveys that claimed the cash ban devastated small businesses. More than 1.5 million jobs were said to be lost and newspapers reported deaths linked to the decision.
“However, in the medium term, benefits including increased tax compliance and financialisation of savings will likely play out,” Teresa John, Mumbai-based economist at brokerage Nirmal Bang, said in a report. “But the key question is whether such a drastic measure was required to achieve these objectives.”

Modi cash ban a ‘total failure’
as 99% of banned notes back

Bloomberg

Indians have deposited nearly all the currency bills voided by Prime Minister Narendra Modi, denting the central bank’s profit and dealing a blow to his drive to unearth unaccounted wealth.
Banks have received $239 billion, or 99 percent of the currency invalidated, the RBI said in its annual report. The government had initially estimated about 5 trillion rupees wouldn’t be declared following the sudden move on November 9, indicating that this was cash stashed away illegally to avoid tax. The cash ban prompted the central bank to print new currency, reducing its profit and cutting annual dividend payout to the government by half.
“This data proves that demonetisation was a total failure,” said Mohan Guruswamy, chairman of New Delhi-based Centre For Policy Alternatives. “The prime minister obviously had overstated his case. You’ve lost so many jobs across sectors. How can people trust Mr. Modi and his numbers?”
Supporters of the cash ban saw the action as a battle against the rich who salt away their wealth without paying taxes. Modi’s party had a victory in a key state soon after the move to ban 86 percent of the nation’s cash, though subsequent data show that the economic shock has slowed growth and investment in India.
A raft of economic data since the note ban decision have signaled that $2 trillion economy was hurt by the cash clampdown, raising fears that the economic growth would stall.
Electronic payments have risen 21 percent since November to 113.7 trillion rupees in July, though they dipped from its peak of 150 trillion rupees in March, central bank data show.