In a recent interview with The Times of India, Raghuram Rajan, former governor of the Reserve Bank of India, said that it was important for India to get its citizens to pay tax, but that demonetisation had not proved to be a fruitful exercise.
The Modi government withdrew the ₹500 and ₹1,000 notes from circulation on November 8, 2016, claiming that it would cut out black money, curb tax evasion and put the country on the path to digital transactions.
"I think all said and done, it would be fair to say the intent was good. But certainly at this point, one still cannot in any way say it has been an economic success. But again, as I said, only time will tell," he said.
Rajan now teaches economics at the University of Chicago Booth School of Business.
Earlier this week, the RBI reported that 99 percent of the banned currency notes had been returned to central bank, calling into question the rationale for demonetisation, an exercise which caused nationwide suffering. Meanwhile, India's GDP growth rate has slumped to 5.7 percent in the first quarter of the financial year.
"One, of course, is that we have seen the costs of demonetisation upfront, and they are substantial. Let us not mince words about it - GDP has suffered. 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," Rajan said.
"I think the people who mooted this must have thought that some of it would be compensated if money didn't come back into the system. The fact that 99 percent has been deposited certainly does suggest that aim has not been met," he said.
On the issue of 99 percent of the currency coming back to the central bank, Rajan said that government could investigate the deposits, and some of it may turn out to be black money, but it would mean a greater effort is required and would involve more harassment for the general public.
As more questions were raised about its claim that demonetisation would cut out black money, the Modi government shifted its goal post, focusing on the push towards digital transactions.
On this issue, Rajan said, And if you look at electronic transactions, you see that there was a blip-up when demonetisation happened but it has come back to broadly the trend growth line. One area where there has been substantial take off is transactions done on the Unified Payment Interface, and that's a positive for the economy. The question is, would it have happened anyway because UPI was at an early stage when demonetisation happened, which just pushed the process forward?"
In his forthcoming book, 'I Do What I Do: On Reforms, Rhetoric and Resolve', Rajan articulates the position that he had communicated to the Modi government: economic costs would outweigh the benefits.
In the interview with TOI, Rajan said that the underprivileged sections of society were the worst hit by demonetisation.
"It is probably fair to say that demonetisation has had the largest impact on the people who transact informally, of which many might be very poor. And again we see some sort of anecdotal evidence of this but we have to wait for a better measurement," the economist said. "Unfortunately, given the way we measure GDP, these are people who are probably not going to be counted that much."
Read the full interview here.
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