December 14, 2016 3:14:47 am
It was during Dr Bimal Jalan’s time as RBI Governor that India weathered the Asian crisis. His tenure (November 1997 to September 2003), in fact, more or less coincided with the NDA-I term. In an elaborate interview with P Vaidyanathan Iyer, Jalan discusses the demonetisation decision of the NDA-II government. Excerpts:
When do countries opt for demonetisation? Was there a pressing need for it in India?
Now, in demonetisation, there are two sides to a coin. What demonetisation does is to give, as it were, a message to people that this will not be tolerated. Black money hoarders are depositing money, trying to put it in real estate, gold, etc. So, it will certainly reduce the stock of black money. But this is stock. Now, the question is of flow.
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The second part, which is equally relevant is, why now? Why take a measure which has a substantial impact particularly in rural areas, semi-urban areas, where the availability of Rs 500 notes is relatively limited at the moment, and similarly the high denomination notes are generally not for transactions, and they require cash.
Why now? It could be done in a way where people are prepared. Telling people that we are concerned about black money is also about giving them a notice. Supposing it was announced that the old Rs 500 and 1,000 notes will be demonetised, and replaced with new notes. What would have happened? It’s possible that black money holders would have deposited their money in banks. But this is precisely what black money hoarders are doing (with decision being kept secret), maybe not to the same extent. But a notice would have been given. So ‘why now’ is not clear. Also, not everybody is a black money holder. 90-95 per cent of the people don’t hold black money. This is where we need to strike a balance, doing something with a notice and doing it in a way where the majority of the people are not hurt.
So would you say there was perhaps no need to keep it such a secret?
There is no reason to my mind to be secretive, unless there is an emergency. I want to do it in three weeks, or two weeks or one week … you follow, if it is about a surgical strike. But this is not the same. On that, there can’t be two views.
Will we see an adverse impact of demonetisation on the economy?
No, not because of this particular event. But this does not eliminate black money per se. What is black money? If you don’t pay the tax, the money that is not declared as income, you can say so, it is black money. What I am trying to get to you is that there can be no two opinions, that a message should be given and the other part of it is to implement it in a way that the general population should not be adversely impacted by the action we take, that too without notice.
So, not giving notice was a critical missing part…
To my mind, yes. What prevents my government from taking cognisance of what is well known i.e., how much currency can it print. It is coming in the newspapers. What is the advantage if I cannot print it within a limited period of making a very large proportion or multiple of that as illegal tender. How does that the ordinary person handle it? You have to take action such that it doesn’t affect the small and medium businesses. This SME class has been worst affected because it deals in cash. Grocery shops on the road, etc. The core point is if the impact of that on the people is negative then you have to try and find the means to see what can be done. For example, we said, new old 500 notes will not be legal tender after 5-6 months, so deposit them or use them till then.
This push to digitise the economy, it also seems to be happening in a hurry?
But digitisation, nobody can disagree. Most positive step that has been taken is direct benefit transfer to the poor. Secondly, Jan-Dhan Yojana to transfer money is a very effective step. There can be no doubt. But one has to take into account the fact that the poor go to the ration shop, they are dealing with the shop owner, they are not dealing mobile-to-mobile. You cannot make it mandatory in our situation. Nobody can disagree that we should digitise, there should be much more cashless transaction… But this has to take time, not months, but years. If you are illiterate, you can use your mobile phone to talk, but you cannot transact. Because transaction would mean you would write. It’s a lot about illiteracy.
Demonetisation takes care of the stock, not the flow. So will it stop corruption or generation of black money?
Part of the money has been deposited, part of it used to buy jewellery, real estate, etc. You have to wait and see how much of the black money has actually remained… You see the end is fine, you have to carefully choose the means to achieve this end. When you are talking about corruption, you have to bear the fact that it is also difficult to get government permission to build a house … You can’t stop it … citizens will pay bribes if it’s difficult to get things done. Some good things have been done — DBT, Jan-Dhan. The only way corruption can be tackled is by strengthening ease of doing business. By providing electronic access to services, allowing use of instruments which don’t require waiting in a queue, by making tax systems much simpler. When GST comes into effect, it will have a positive impact across the country.
Couldn’t the government have imported currency to better manage the demand?
Of course. The one thing to keep it secret is that black money holders will then transfer it. What you are seeing in the picture is people are doing something. So the stock part, the other side — the flow would also reduce because people will not be able to hold cash. So there are two sides — personally, what I would like to ask is the large majority of the people in our country are not black money holders. because the level of incomes are not high. there are tax exemptions. so we could take measures in a way by giving notice.
There have been questions on RBI autonomy as well…
The RBI and the government have to work in consonance. The word autonomy means various things. You are an autonomous writer, but you can’t defame. So you have to discuss, and hopefully what you do in the RBI will be consistent with what is good for the economy, and for the people.
Will inflation and interest rate come down as some experts point out?
Let’s wait and watch. One can’t say it now.
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