RBI's Rajan Warned Modi About "Short-Term Costs" Of Demonitization

In what’s likely to be remembered as one of the most spectacular policy failures in recent Indian history, Prime Minister Narendra Modi’s decision to abruptly cancel high-denomination banknotes – a move meant to punish corrupt officials and criminals – instead destroyed the savings of middle- and low-income Indians and caused widespread chaos in the country’s financial system.

And now, less than a year since the “war on cash” was announced, prominent former government officials are speaking out and placing the blame for the policy squarely on Modi’s shoulders, including former Reserve Bank of India governor Raghuram Rajan, who told the Times of India that he had cautioned the government that the short-term costs of demonetization would outweigh the long-term benefits, and suggested "alternatives" to achieve the goal of stamping out black money.

Raghuram Rajan

When Modi announced in November that Rs1,000 ($16) and Rs500 notes would no longer be legal tender, he suggested that corrupt officials, businessmen and criminals — popularly believed to hoard large sums of illicit cash — would be stuck with “worthless pieces of paper”. At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy - as the wealthy abandoned or destroyed it, rather than admit to their hoardings - reducing central bank liabilities and creating a windfall for India’s government. Meanwhile, ordinary Indians would opt to keep more of their money in electronic deposits at their bank, helping to shore up the country’s financial system.

In his new book, 'I Do What I Do: On Reforms Rhetoric and Resolve', an advance copy of which was obtained by the TOI, Rajan says that he first gave his opinion on demonetization orally in February 2016 and, subsequently, RBI submitted a note to the government outlining the steps that would be needed, and the time required, if the government went ahead with it.  

“’The RBI flagged what would happen if preparation was inadequate,’ wrote Rajan, who returned to University of Chicago Booth School of Business as faculty after his term as governor ended.”

Rajan also clarified to the TOI that although RBI was consulted about the policy, at no point during his term, which ended in September, was it asked to weigh in on a decision.

He added that the intent behind the move was good, though it came at a substantial cost to the public. "Certainly at this point, one cannot in anyway say it has been an economic success," he pointed out.

The Indian government has continued to defend the policy, arguing that several other benefits have accrued, from expanding the tax base to an increase in digital transactions.

However, since Modi abruptly implemented his plan in November, India's GDP growth has slowed dramatically. Following a collapse in its Composite PMI, India's Q2 GDP growth slowed to 5.7% during the second quarter, according to data released last week - its weakest since Q2 2014.

In what looks like confirmation of the demonetization’s failure, the RBI’s annual report on Wednesday suggested that most holders of the old currency managed to dispose of it, estimating that banned notes worth Rs15.28tn ($239bn) were returned to the bank. That amounts to 99 per cent of the Rs15.44tn of the old high-value notes that were in circulation when Mr Modi made his announcement, according to the finance ministry.

The government’s critics seized on the RBI’s announcement as evidence of the policy’s failure.

“99 per cent notes legally exchanged! Was demonetisation a scheme designed to convert black money into white?” former finance minister P Chidambaram tweeted.

Rahul Gandhi, de facto leader of the opposition Congress party, tweeted: “A colossal failure which cost innocent lives and ruined the economy. Will the PM own up?”

Many lower income Indians supported the ban because they believed the rich would suffer the worst of its privation. Instead, they became victims of the government’s “good intentions.”


HRH Feant2 (not verified) Mon, 09/04/2017 - 16:21 Permalink

I remember the photo of an older Indian that died waiting in line. People just walked on by. Weird country.

Skateboarder HRH Feant2 (not verified) Mon, 09/04/2017 - 16:29 Permalink

Not stranger than the country where 'concerned' 'citizen' 'parents' call the cops on kids who are playing outside without continuous 'adult supervision,' and police come to destroy food that is being passed to the homeless, and where teaching very young children about sex and sexualizing them by shoving gay/tranny 'equality' down their throats is seen as a good idea.

In reply to by HRH Feant2 (not verified)

ogretown Mon, 09/04/2017 - 16:24 Permalink

On what planet in any alternate universe did dipshit Modi ever think the wealthy and the legions of black marketeers would simply burn their fiat currency??  Modi is an abject failure, a simpleton and far too naive to run a dog walk service, never mind a country the size of India.  It will be interesting to see what other dumb ass moves this clown can come up with.  Mind if he gets too silly, one might see him being permanetly removed before he creates any real harm. 

Bam_Man Mon, 09/04/2017 - 16:55 Permalink

Typical back-stabbing, sneak of an Indian.Will gladly take credit for efforts of others and always tries to shift blame for his own failures.I worked with snakes like him for many years.

junction Mon, 09/04/2017 - 17:08 Permalink

I wonder how many of those Rs1,000 notes were counterfeit.  Say you had found a way to counterfeit large rupee notes, counterfeits that were near exact copies of the real notes. How would you explain turning in those notes to banks in big quantities by yourself or using a few associates. By outlawing such large notes, Modi gave the counterfeiters the opportunity to unload those notes, masked by many other Indians turning in legitimate large rupee notes. 

NumbersUsa Mon, 09/04/2017 - 18:39 Permalink

by Jonas E. Alexis"Hollywood has been brainwashing people for far too long, and it is high time that we turn the floor to historian Thomas Goodrich, a gentleman whose book Hellstorm has been meticulously detailed, researched and documented.You see, Hollywood will never tell us what happened to the poor German civilians after the Allied invaded Germany because that would literally destroy the “Holocaust” project. Goodrich dissects the issue like a good surgeon. If readers would like to get angry, then it is almost certain that Goodrich is going to get them very angry.Furthermore, if you used to call the Allied forces “the good guys,” then you probably will change your mind after you sift through the following article, which is just a taste of what the Germans actually went through. We all hope that you will get a glimpse of the other side of the Allied forces.Goodrich was kind enough to send me a copy of his book in the fall of last year. He also has been generous to send me this trenchant article, which is taken from his book. No praise can be too high for Hellstorm."One man opposed to the vengeance-minded program was George Patton.“Evidently the virus started by Morgenthau and [Bernard] Baruch of a Semitic revenge against all Germans is still working … ,” wrote the general in private. “I am frankly opposed to this war-criminal stuff. It is not cricket and it is Semitic….I can’t see how Americans can sink so low.”https://www.youtube.com/watch?v=O6IHHRcUeas

maplesyrup Mon, 09/04/2017 - 20:37 Permalink

I Had an indan friend that used to lend. $$, 2% per month and gold as collaterall. Only to other indians, never had an issue, once took 50 acres of land in the middle of BFN in India someplace for 2k. Modi is a eiher a fool, being advised by fools, or there was something in it for him. Who benefits?

Herdee Mon, 09/04/2017 - 22:27 Permalink

Everyone just got the black market people to cash it in for them. It became a giant shuffle. In other words they gave others a cut of the action in return for their services. A lot of poor people got a free windfall bonus through going to the bank on behalf of all the crooks so that government officials could be avoided.

onmail1 Tue, 09/05/2017 - 00:34 Permalink

Many experiments are being done on lndiansactually due to the unelected dictator Jetley at the helm who is a puppet of westand using his fin. ministry to create a mumbo jumbo(mabbe he projects himself & his ministry as tbtf)fin. mumbo jumbo can make u believe anythingHowever the govt is oblivious to many things especially corruption:===========-Govt gives autonomy to public sector, which seems good but actuallyit opens a big loop hole to do widespread corruption(by ministries' officials)-most corruption is tied to nepotism. Ministries' officials and public sector colludeto give jobs to their own kin & offspring in lieu of big contracts- Nepotism also paves way for dynastic rule in public sector, free of any fear-Finance ministry auditors, if they find many problems in companies booksthey choose to ignore when given huge benefits especially jobs to their family members.-They even select cos. directors among themselves-They declare their corrupt wealth as agricultural income which has no tax at all(while enjoying in farm houses in capital)Jetley has let this loophole intact(mabbe for a motive)-Another loophole created by Jetley minister is that ministriescan give huge contracts directly to any one(possibly for organised corruption)-Most of the ministries officials(almost all) are involved so everybody keeps mum(one for all and all for one)