Raghuram Rajan slams demonetization, says he was never in favour of it

Raghuram Rajan, the former Governor of the Reserve Bank of India has said that the Narendra Modi government had never consulted the RBI during his stint over the decision of demonetization. 

“At no point during my term was the RBI asked to make a decision on demonetization,” Rajan said. 

In a revelation made in his book– I do what I do – which is a compilation of speeches he delivered on wide range of issues as the RBI governor, Rajan said that he was never in favour of the government ambitious move of demonetising the legal tender of Rs 500 and Rs 1000 notes on November 8,last year. 

This is the first time RBI former governor, Raghuram Rajan has spoken over the demonetization issue after exiting his office in 2016. He now teaches economics at University of Chicago. 

The former governor in his book wrote, "I was asked by the government in February 2016 for my view on demonetization, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them". 

However, he didn’t elaborate on the short-term costs or the possible long-term benefits, but as the RBI governor he “felt there were alternatives to achieve the main goals.”

The recent RBI annual report which was released on August 30 had shown that the demonetization did not go down well with the economy.  The GDP data also slowed relevantly because of the cash squeeze that had impacted the smooth functioning of the transactions. 

The government, however, has still denying any kind of negative effect of demonetization on the economy. But Rajan, in an interview to Times of India has referred the deceleration in GDP as “the costs of demonetization upfront.”

“Let us not mince words about it – GDP 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 may be approaching Rs 2.5 lakh crore,” he said in the interview.

“I think the people who mooted this must have thought some of it would be compensated if money didn’t come back into the system,” he said. 

The RBI revealed in its annual report that Rs 15.28 lakh crore, of the total Rs 15.44 lakh crore worth of currency notes in circulation, had been returned to it after the demonetization drive, till June 30, 2017.

The amount that has not come back stands at a meagre Rs 16,000 crore. This figure excludes the currency held in Nepal and at district co-operative banks.

“The fact that 99% has been deposited certainly does suggest that aim (of curbing black money) has not been met,” Rajan said in the interview.

Despite his reservations, Rajan wrote in his book, the RBI was asked to prepare a note, which it did and handed to the government.

The RBI note, he said, “outlined potential costs and benefits of demonetization, as well as alternatives that could achieve similar aims. If the government, on weighing the pros and cons, still decided to go ahead with demonetization, the note outlined the preparation that would be needed, and the time that preparation would take.”

He further stated that RBI even wrote the consequences of what would happen in absence of the adequate planning. 

Meanwhile, former finance minster and senior Congress leader, P. Chidmbaram had hit out at the government for its November 8 decision. Targeting the Centre, he said that the 'main objective of forcing people with black money to suffer losses has failed miserably'.

He further said that even after the November 8 note ban, fake currency has surfaced, terrorist activity has not abated and black money continues to be generated and used.