Rajan warned Modi against demonetisation

NEW DELHI — The man who predicted the 2008 global financial crisis also presaged the damage Prime Minister Narendra Modi’s unprecedented cash ban would cause to India’s economy.

Raghuram Rajan was governor of the Reserve Bank of India in February 2016, when he was asked by the government for his views on demonetisation, according to Rajan’s book I do what I do, the first time he’s spoken about his experience in the country.

“Although there may be long-term benefits, I felt the likely shortterm economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals,” he wrote in the book. “I made these views known in no uncertain terms.”

The central bank then prepared a note outlining costs, benefits and other options available, as well as detailing the preparation that would be needed and the time it would require.

“The RBI flagged what would happen if preparation was inadequate,” Rajan said. “At no point during my term was the RBI asked to make a decision on demonetisation.”

This wasn’t the first time that Rajan had warned against demonetization. Back in 2014, when the matter hadn’t yet been broached by the government, he was asked at a public lecture for his views about invalidating currency bills. He replied that holders of unaccounted wealth find ways to divide their hoard into many smaller pieces, and much of this is typically in the form of gold, making it harder to track. —