Here's What Raghuram Rajan Thinks Of Currency Demonetisation

Here's What Raghuram Rajan Thinks Of Currency Demonetisation

The government's currency swap plan to withdraw Rs 500 and Rs 1,000 bank notes from circulation as a way to demonetise is being hailed by many banks and experts as the ultimate weapon against black money. However, demonetisation, as a strategy, isn't new and has been tried before with limited success.

Here's what former Reserve Bank of India governor Raghuram Rajan once said during a lecture on the topic of demonetisation and if it worked.

Rajan: I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past demonetisation has been thought off as a way of getting black money out of circulation. Because people then have to come and say "how do I have this ten crores in cash sitting in my safe" and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is the clever find ways around it.

They find ways to divide up their hoard in to many smaller pieces. You do find that people who haven't thought of a way to convert black to white, throw it into the Hundi in some temples. I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch. I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes.
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