If Raghuram Rajan didn’t, who advised Modi govt on demonetisation? And why?
Former Reserve Bank of India governor Raghuram Rajan’s book indicates that the government chose to ignore the collective wisdom and numerous cautions advanced by the RBI
NEW DELHI: Former Reserve Bank governor Raghuram Rajan has finally broken his silence. In his latest book – I do
what I do – Rajan confirms that at no point until his term ended on September 3 last year did the RBI
conclude a decision on demonetisation.
This revelation, coupled with data released by the government and the RBI over the past week, reaffirms
what critics of demonetisation have long argued: That it was not only implemented without adequate
preparations but, significantly as well, there was no compelling economic rationale for such a
The growth of the broader economy has, in fact, slowed sharply from 7% in October-December 2016 to 6.1%
in January-March and 5.7%in April-June quarter of 2017. The impacts of the cash squeeze and disruptions
following the November 8 shock-and-awe decision to scrap high-value banknotes are far from over.
Consumer spending continues to be weak and businesses remain wary of making new investments. A sharp
turnaround for the economy is unlikely to happen soon.
My colleague Manas Chakravarty at Mint has illustrated this well, pointing to the declining
contribution of private consumption spending to GDP growth: From 66.2% in January-March to 62.3% in
April-June of this year. This fall was more than offset in the April-June quarter by a sharp increase
in government spending, which is unlikely to sustain. The fiscal deficit in the first four months of FY
2017-18 has already touched 92.4% of the annual target, making the government vulnerable to pressures
from international rating agencies and leaving it with little headroom to spend more to boost demand in
Rajan, as it turns out, was correct in advising the government that the “short-term economic costs” of
demonetisation would outweigh any longer-term benefits. The RBI under his watch even went to the extent
of preparing a note, which listed out in detail the pros and cons of demonetisation, the alternatives
available and the preparations that would be needed if the government still chose to go ahead. The
central bank also flagged what would happen if the requisite logistics were not in place.
These disclosures by the former governor – we are hearing for the first time – make it clear that Prime
Minister Narendra Modi’s government chose to ignore the collective wisdom and numerous cautions
advanced by the RBI.
It is also evident that the note-ban decision, billed as India’s biggest ever assault on black money,
hasn’t had much impact on either the stock of illegal cash or its flow. Official data, available now,
shows 99% of the Rs 15.46 lakh-crore held in denominations of Rs 1000 and Rs 500 have returned to the
banking system — meaning hoarders of black money found a way to legitimise most of their dodgy cash.
What then were the compulsions that drove the decision for demonetisation? Even as the RBI in its
measured judgement remained unconvinced that a shock withdrawal of high-value notes, which were worth
86% of the cash in circulation, would be effective in addressing the stated goals of checking
corruption, counterfeit currency and terror funding.
Who advised the government to go for demonetisation? Were the other alternatives suggested by the
central bank duly considered? If the decision was made after September 3, as Rajan indicates, what were
the reasons to rush it through?
The above questions now carry the full weight of being India’s most intriguing political puzzle of
recent years. As the economic pain worsens in the coming days, the demand for the answers to the ‘who’
and ‘what’ of demonetisation will only grow louder.
It is in the interest of the government to come clean and transparent on this, at the earliest. Failing
which, all the ingredients for a politically and economically damaging scandal are in the air.
Governments, as history will tell us, in the absence of facts and truths can be brutally punished by
rumour, innuendo and speculation.