The demonetisation of 500 and 1000 rupee notes is something the nation is still struggling to digest from common man to indusrialists, from artists to politicians. Many people are pro this change and are also applauding the RBI governor, Urjit Patel for supporting Modi’s decision to drive out black money from the economy. 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.
My sense is the current tax rate in this country is for the most part reasonable. We have a reasonable tax regime, for example, the maximum tax rate on high-incomes is 33%, in the US it is already 39% plus State taxes, etc., it takes it to near 50. We are actually lower than many industrial countries. Given that, there is no reason why everybody who should pay taxes is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.
Reading the above do we need to believe that Raghuram Rajan was against demonetization? Was this the reason for him to be replaced by Urjit Patel? Earlier Raghuram Rajan had expressed his desire to extend his tenure by one year as governor. But suddenly Urjit Patel on 20 August 2016, was named as the governor of RBI to succeed Raghuram Rajan when the latter’s term expired in 4 September 2016