Raghuram Rajan breaks silence, says he wasn’t on board for demonetisation

By Rajesh Mahapatra , 2017-09-03 06:50:29

Former RBI governor Raghuram Rajan has revealed that he did not favour demonetisation as he felt the short term economic costs associated with such a disruptive decision would outweigh any longer term benefits from it.

Rajan makes the disclosure in his latest book – I do what I do – which is a compilation of speeches he delivered on wide range of issues as the RBI governor. Although he maintains the book is not a tell-all, the short introductions and postscripts accompanying the pieces offer fascinating insights into his uneasy relationship and differences with the present government.

“At no point during my term was the RBI asked to make a decision on demonetisation,” Rajan has said, putting to rest speculation that preparations for scrapping high-value banknotes got underway many months before Prime Minister Narendra Modi made the surprise announcement on November 8.

This is the first time the former RBI governor has spoken on demonetisation since demitting office on September 3 last year. Rajan, who now teaches economics at University of Chicago, said he chose not to speak on India for a year because he didn’t want to “intrude on his successor’s initial engagement with the public”.

“I was asked by the government in February 2016 for my view on demonetisation, which I gave orally. Although there might be long-term benefits, I felt the likely short-term economic costs would outweigh them,” Rajan wrote.

“I made these views known in no uncertain terms.”

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.”

Latest government data showed the November 8 decision to scrap Rs 1,000 and Rs 500 notes, sucking out 86% of cash circulating in the system, has had a lingering impact on the economy.

The growth of GDP slowed sharply from 7% in October-December quarter to 6.1% in January-March and 5.7% in April-June, primarily because of the cash squeeze that weakened consumer spending and discouraged businesses from making new investments.

The government, however, maintains that the economic slowdown has not been entirely because of demonetisation. In an interview to Times of India, published Sunday, Rajan described the deceleration in GDP as “the costs of demonetisation 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.

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Source: Hindustantimes.com

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