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Raghuram Rajan's note against demonetisation should be made public: Montek

Indian economy for the last several years has been second only to China in terms of its growth rate, he said

Karan Thapar | The Wire 

Raghuram Rajan's note against demonetisation should be made public: Montek

Former deputy chairman of the Planning Commission, Montek Singh Ahluwalia, spoke to Karan Thapar about demonetisation, the goods and services tax (GST) and the rating upgrade by Moody’s. Edited excerpts:

On demonetisation

The finance minister is obviously keen to present the most positive picture he can think of. It’s probably been the most discussed initiative of the government, of any government for a very long time. Primarily because it was, in some sense, a very bold move, because after all, you’re taking out 86 per cent of the currency, and that’s not a marginal change. But I go along with the general assessment that it’s been quite disruptive, probably more disruptive than the government itself imagined.

It’s had a negative impact, particularly on the informal sector, which was the most cash dependent. 

Whether it has changed all the basic attitudes towards corruption, I have not seen any evidence of that.

On the question of the cash transactions, my understanding is that there was a huge, there was a big decline, and as the cash has come back into the banks, there will be a process of remonetisation. So some of the cash will be pulled out and we need to give it a little more time, to work out how much has the cash to GDP ratio actually gone down.

I don’t believe that had any significant effect on counterfeit currency, because people who are counterfeiting currency will counterfeit the new currency. I guess the terrorist financing issue was also connected with counterfeit currency, in the belief that they are financed by counterfeit currency. So there may have been a shock, but counterfeit’s already evident that they are there.

We don’t really know how (the informal sector) badly damaged, but we do know that it must have been much more badly damaged than the formal sector. I mean for two very important reasons. One is that the informal sector was cash dependent. So if you give a big jolt to cash, their activity would be hit. You know in the very short run, like if it was something that was sorted out in a week, the problem would have been quickly taken care of because within the informal sector there are credit arrangements. But you know, it took more than six months for it to get anywhere close to normal. So a six-month disruption of the informal sector would’ve been a very serious disruption. Now I can’t say in terms of percentage, but you know, a lot of people talk about 20 per cent, 25 per cent lower economic activity. Now if that is so, that’s quite substantial.

The RBI’s role

For governments, the eminence of the person giving advice should not be a guarantee that the advice is taken. But personally I think the best thing would be to publish (former RBI governor Raghuram Rajan’s) note (where he advised against demonetisation). I mean if the note was given, this matter has gone before the standing committee in Parliament, to weigh exactly what the governor said and to look back on was he right. I mean the best thing would be to put the note in the public domain and let everybody judge for themselves.

There is no secrecy issue involved, he said he gave a note. The government rejected or disregarded it. Subsequently, the Reserve Bank board is supposed to have advised the go ahead and do it. For example, I don’t know whether the Reserve Bank board was actually briefed on the note which the governor gave to the government.

I think it’s extremely important to maintain the credibility of the RBI, so I don’t want to add to criticism. As you say, if the RBI did it under the direction of the government, they probably didn’t have any alternative.

I think personally, as an individual, that the board paper, on the basis of which the RBI board made the recommendation, should also be made public. 

My impression, from the public statement that made, is that, if it is to be done, you better prepare for it and I assume that meant get all the currency ready, I mean it was very clear. 

Goods and services tax (GST)

I have always been in favour, as indeed practically all economists have been, in making the switch to the But I said when it happened, the way it was being done, it would not be an ideal We must also be realistic, that you never get the ideal. So you always get, a little bit of progress, and then there are glitches. Now having said that, number one — the number of rates, I mean there are just far too many. And a kind of puristic approach, which of course never exists anywhere, is that a few exemptions one rate, I would say not an unreasonable approach would be a few exceptions, I mean zero and then maybe two rates, and perhaps sort of a cess which is not a rebatable thing, which is not something you take credit for, for a few sin items. That would have been a very good system. Instead, we have got five rates, or six rates.

If you have a zero, and two rates in the middle, and a sin rate at the top, you can fit the Mercedes and the chappals and food into this spectrum. At the margin, let’s look at it this way, at the margin, by moving some commodities from a higher rate to a lower rate, you increase the overall degree of progressivity. You don’t have to ensure that every commodity is differentiated from every other, depending on the income level of the person most likely (to) consume it. It’s basically wrong. Now, let me say, finance ministry officials, and I assume that these are things that these officials advised on, they agree that there are too many rates. This whole thing became difficult as I understand it because the Council, which includes lots of state finance ministers, wouldn’t agree.

From the numbers that I have seen, if you did some zeroes and a sin tax, a 15 per cent single (tax) would be practicable. 

The Moody’s upgrade

The Moody’s upgrade is welcome. And I think it’s overdue. The truth of the matter is the Indian economy for the last several years has been second only to China in terms of its growth rate, and pretty stable. So frankly that upgrade was overdue, necessary; I am glad it happened.

If Moody’s cited the GST, I think that certainly is a relevant factor. In the sense, most people expect that there will be a transitional cost, obviously managing the transitional cost is something we should be doing, but you know, after the transitional costs, benefits flow in, so Moody’s would be right in saying that now that the is done, the constitutional amendment is done, problems are being fixed, perhaps, three-four months later, you’ll have a much better system. 

And I think that is fair.

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First Published: Mon, November 20 2017. 01:10 IST