After a long political slugfest, and no celebrations this year to mark the second anniversary of Demonetisation, here comes Raghuram Rajan stating in unmistakable terms that the controversial governmental step has worked to the disadvantage of the national economy. As former Governor of the Reserve Bank of India and a highly respected figure at that, he should know. Notably, he has stated the same about another of the Modi government’s step – the Goods and Services Tax (GST) regime aimed at unifying the taxation systems across the country –the next logical market intervention step after the economic reforms of the early 1990s.
One perceives that Rajan, now gainfully engaged in academic pursuits in the US and straddling the global economic fora, has no axe to grind when he stated as much at a university lecture series in Berkeley. This is unlike the cacophony of criticism of Demonetisation from political heavyweights within the country. Clearly, this step has caused immense problems to not just micro and macro businesses but also people across the board. The original claims that Demonetisation would help eliminate black money has proven to be hogwash. Almost the entire crop of currency returned to the banks and the black was converted to white money through ingenious ways. This is both curious and surprising. It shows how the systems are open to aggressive manipulations. Prime Minister Modi clearly failed to grasp the potential for mischief when he announced the step out of the blue and obviously without proper preparations.
Banking institutions themselves – not excluding RBI – came out in a bad light amid their perceived acts of omissions and commissions in relation to handling this situation. It is safe to suspect that lots of mischief had been played out as is also evident from reports that rackets are still operating to collect demonetised notes in exchange for new notes – for a cut. At the same time, the entire lot of currency in circulation has, for now at least, become taxable money and the exchequer would stand to benefit.
GST, originally conceived by the UPA and taken forward by the Modi government, was the calling of the times. In its implementation, there were too many glitches, and these were only to be expected. Markets have been badly shaken. Rectifications are a normal process and would take time. Be that as it may, it would be curious to watch how these two steps would impact on PM Modi’s future and the General Elections 2019.