‘Demonetisation was not a well thought-out, useful exercise’

“Demonetisation I think was not a well-planned, well thought-out useful exercise. And I told the government that when the idea was first mooted. It seemed to me that people would find their way around,” Rajan said at the Harvard Kennedy School in Cambridge. 

“At the time of demonetisation, it was 87.5 per cent of the currency value. Any macro economist would say that when you are demonetising 87.5 per cent of the currency, better make sure that you print 87.5 per cent or pretty-much close to that. India went into it without having done that,” Rajan said. Rajan said essentially the money that was demonetised came back to the system, “but it did not have the direct effect that was sought that a lot of people will pay taxes.” “There may be some longer term impact that people think that if this sort of thing happens that the government is serious of collecting taxes, there may be greater tax payments, but we still have to see strong evidence that is true,” the ex-governor said. “So the negative economic impact that people not having currency, not being able to pay, economic activity plummeting, especially in the informal sector, that happened. A lot of people probably lost their jobs, we do not count that well because it is the informal sector.” He said: “The positive impacts are out there in the future, we do not know whether they will be important and to my mind, it was not a policy that was useful at that time.” 

On whether RBI was consulted before the Centre announced demonetisation, Rajan said: “We were consulted and we did not think it was a good idea. The cost of demonetisation varies between 1.5-2 per cent of GDP.” Talking about the non-performing assets and multi-crore Punjab National Bank scandal, Rajan said the worry is some of the banks still follow antiquated system. 

“Worry is systems are not adequate to prevent rogue dealers, rogue employees colluding and making off with stuff.”