RBI role in note ban Taxation gains
“The demonetisation puzzle” read with Subhomoy Bhattacharjee’s “The backroom story: How it all played out” (November 7) demystifies the note ban last year. For those who have been following the happenings since November 8, 2016 and were not able to solve the “puzzle” yet, can find enough clues to move towards reasonably acceptable answers for questions like why note ban was considered as an option to fight black money, why things went wrong midway, if they really did, and what was the role of the Reserve Bank of India (RBI) in providing backward and forward linkages in implementing the project in its capacity as advisor to government of India and currency manager.
Raghuram Rajan is known for his clarity of thoughts and expression on monetary policy and central banking matters. His faultless book, “Fault Lines”, and the recently released book “I Do What I Do” carry enough evidence to prove this, if recorded evidence was necessary. But there has been an obvious deviation. Rajan’s one-year silence following his exit from Mint Road and sudden reappearance and expression of views on the functioning of the RBI have confused even his fans. His cautious observation about short-term economic costs outweighing long-term benefits of demonetisation, made almost one year after the event, was apt. As the opinion against note ban was given orally and a document on demonetisation prepared by the RBI approved by Rajan reportedly exists (not in public domain), enough damage has been done to the dwindling reputation of the central bank.
Rajan’s observations make it abundantly clear that the RBI was associating with the groundwork for demonetisation from February 2016. Knowingly or unknowingly, he has exposed himself to the allegation of not getting himself involved in preparing the RBI adequately to implement note ban, once a decision was taken by the government.
MGWarrier Thiruvananthapuram With reference to “The demonetisation puzzle” (November 7), if we look at the demonetisation exercise on a standalone basis, it does appear to be a conundrum extraordinaire. The disruption cost caused clearly outweighed the intended objectives in the short term. However, if it is seen as one of the pieces in a jigsaw puzzle, one might not be surprised especially if he looks at the series of economic events or measures unfolding in its aftermath.
It is a no-brainer that the menace of black money cannot be wished away just with the banishment of old high-denomination notes. To tackle it, a multipronged approach, covering the structural issues, needs to be adopted. The government of the day has decided to address the bigger issue of corruption and black money in a more comprehensive way covering both short-term and long-term measures. The continued stress on digital payment, deregistering of shell companies, sharp focus on benami properties, among others, indicate such an approach.
Implementation of the goods and services tax, with a resolve not seen in the past, also indicates the government’s intention to make the overarching taxation architecture transparent and technology enabled. No doubt, it is still a work in progress and the teething troubles, of varying intensity, will get smoothed out over time. With a greater proportion of people coming under the tax (indirect and direct) network, the government will have more leeway to make the taxation structure less burdensome and thereby obviate the propensity to evade taxes through illicit means.
Economic decision-making, especially of the nature and proportion of India’s demonetisation gamble, is fraught with many unknowns and hence could entail serious consequences. Yet, one year is not enough to judge the efficacy and impact of such a measure on the economy in general and on the behavioural dynamics of people, in particular. Notwithstanding this, when we try to see the demonetisation exercise as part of many reforms, it becomes a bit easy to appreciate its limited roles at least in the short term.
Y P Issar Karnal