Demonetisation could hurt Indian economy by Rs 2.5 lakh crore

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Former Reserve Bank of India governor, Raghuram Rajan, has said that the demonetisation disaster could hurt the Indian economy by more than 2.5 lakh crore.

raghuram rajan

In an interview to Times of India, Rajan said, “Certainly, the government’s move to try and reduce the amount of black money in the economy through various measures is an important one. But as for demonetisation itself, there are really two or three questions. One, of course, is that we have seen the costs of demonetisation upfront, and they are substantial. Let us not mince words about it – GDP has suffered.

“The estimates I have seen range from 1 to 2 percentage points, and that’s a lot of money – over Rs 2 lakh crore and maybe approaching Rs 2.5 lakh crore. Then there are the other costs – the hassle cost of people standing in line, the printing cost that the RBI says is close to Rs 8,000 crore, the cost to the banks of withdrawing the money, and the time spent by their clerks, by their managers and by their senior officers doing all this, and the interest being paid on all those deposits, which earlier were effectively an interest-free loan to the RBI.”

On being asked if he was aware of the Centre’s Narendra Modi government’s intention to announce note ban, Rajan said that he was party to the conversation.

He said, “I was party to the conversation, as I have already said, on the costs and benefits of the case but not on the date. Separately, we were moving to a new set of notes, not related to the demonetisation exercise necessarily, but as part of a move to a set of newly designed notes. Of course, the accelerated printing of the 2,000-rupee notes did make us better prepared for an eventual demonetisation without a specific date having been fixed.”

Rajan also said that the demonetisation had adversely hit the rural population adding that taking away 87% the currency out of circulation had potential for serious impact on the economy.

He said, “Like any monetary economist, I would say that if you are taking 87% of the currency out of circulation, there will be a tremendous impact on the areas that use cash. It is probably fair to say that demonetisation has had the largest impact on the people who transact informally, of which many might be very poor.”

Last week India’s GDP growth slumped to a three-year low of 5.7 per cent during April-June — lagging China for the second straight quarter — as manufacturing slowed ahead of the GST launch amid demonetisation effect.

Prior to the GDP number being released, the RBI had astonishingly confessed that n99% demonetised currency was back with them dealing a serious blow to the objective stated by Prime Minister Narendra Modi for his note ban on 8 November 2016.

 

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