Nine months after demonetisation, with almost 99 per cent of the banned notes back into the system and the economy gripped by slowdown, the former Governor of the Reserve Bank of India, Raghuram Rajan, has said that if a decision such as this turns out exposed — of not having the right effects on the economy, “as a country, you would want to ask what were the inputs that went into that decision”. Although the government announced it was withdrawing 500 and 1,000 rupee notes on November 8 last year, Rajan, who was Governor until September 4, 2016, was asked by the government in February that year for his views on demonetisation, which he says he provided orally.
In his new book, I do what I do, launched here Tuesday, Rajan says he had conveyed to the government that though there could be long-term benefits, the likely short-term economic cost would outweigh them and that there were potentially better alternatives to achieve the main goals.
He has also said that the RBI put together a note to the government outlining the potential cost and benefit of demonetisation as well as alternatives that could achieve similar aims besides flagging off what would happen if the preparation was inadequate. He added that at no point during his term, was the RBI asked to make a decision on demonetisation.
“I would rather ask the question — to what extent does the decision get informed by good economics? That’s what we would all want. And to that extent if that decision turns out exposed — to not having the right effects on the economy — as a country, you would want to ask what were the inputs into that decision, (demonetisation),” he told The Indian Express in an interview here on Tuesday. Rajan, who has returned to his teaching assignment at University of Chicago, said that he wouldn’t want to share details of who were the top policy-makers who received his and the RBI’s assessment. “I would say anybody who was involved in the demonetisation decisions was informed,” he said.
What he did indicate, though, was that the chilling effect that such a move would have on economic activity, especially on informal activities which cannot migrate to other modes of transactions such as credit cards, was red-flagged to the government. As for the RBI’s apparent suggestion prior to demonetisation to withdraw only 1,000 rupee notes and not the 500 rupee note, Rajan said that the more a currency is used for transactions, the more the central bank has to be in readiness to replace it.
Rajan, who drew flak for voicing his views on issues other than monetary policy — mainly by members of the ruling party — while he was in office, said that as a central bank governor, he had a right to warn, especially as a risk manager of the country, and that it was not correct to equate the RBI Governor with his counterparts in the US Federal Reserve or the Bank of England.
Janet Yellen, the chief of the US Fed Reserve, doesn’t have a developmental or reform agenda while the Bank of England head Mark Carney was criticised much for speaking on the consequences of Brexit. “You have to, in a developing or emerging market, talk about the progress of the system unlike the developed markets. It’s all about whether pieces of action contribute to economic growth or not.”
Rajan said that in none of his speeches as RBI Governor was there any direct criticism of the government and that he was mindful of his responsibilities without wanting to be a fifth columnist while working in the central bank. That was an obvious reference to a speech on tolerance and respect he had delivered at IIT Delhi in October 2015. Read| If there is a sense of intolerance, I think it impedes our economic progress: Raghuram Rajan
The former Governor said that he felt had to speak out at that time. “In an environment — in our diverse country — if there is intolerance, it impedes our economic progress. And it is very important to reinforce and not so much the current situation, our historic tradition of tolerance,” Rajan said.
He said that a government minister he met soon after that told him that this was exactly what he had been saying too and that if there was a sense of intolerance, it impedes economic progress. “If you note, in all these speeches, I have not spoken on Bharatanatyam or yoga or Indian culture. It’s all about various pieces of action.”
Rajan said that the recent Supreme Court judgment on privacy, for instance, reaffirms the faith of many that the core of India is strong and stable and tolerant and that the country would be able to retain it in the days ahead. “But that doesn’t mean that we should be complacent and not aware of the potential dangers to this core. So I think that eternal vigilance is the price of liberty. So we should be vigilant.” He said that India’s greatest strength — as it takes it place on the high table of the global economy — was that, with its low income level, it had already achieved what many other countries were striving to do: an environment of free speech and tolerance.
“If we were to lose this, we would lose our greatest strength in our economy going forward — where innovation and human capital contributions of the highest order are going to be, where value is added. It will be really misguided to lose that strength,” he said. Although he didn’t rule out a role in public policy in the country in the future, Rajan said that he was was not hankering for any assignment as he was enjoying his teaching and research. He said that it was important for the government and policy-makers to recognise and respect the genuine, independent role of the RBI Governor.