Demonetisation doesn’t really deserve a rating on economic policy front because it was not an economic policy action, said Dr Rathin Roy, economist and former member Prime Minister Economic Advisory Council. Here are the excerpts from the conversation with Roy on how wise was the demonetisation decision?


The demonetisation decision, how would you rate on the score of 1-5?

Well, I would rate it off the charts. It doesn’t really deserve a rating. It was not an economic policy action. If the proposition is to take a bunch of notes coloured in pink that have numbers on them and change them with notes which is coloured yellow with different numbers but same value, and if you are able to do it instantaneously, then the impact is zero. But impact of demonetisation came because it was not instantaneous and therefore it should be evaluated, in my view, in terms of economic administrative impact rather than economic impact.

Administratively, Governments of India — Centre and States — particularly GoI is good at doing something at onetime but to do something that requires sustained effort is very difficult and that came out in demonetisation. Prime Minister came on TV and announced demonetisation, notes were withdrawn immediately, but then the whole complicated business of replacing the money began to show up in terms of weaknesses of Central government machinery including the RBI.

There was confusion at the ground level and poor administrative capacity of GoI caused considerable suffering to a large number of people. Demontisation was executive failure at the top because they should have had a more realistic assessment of the capabilities.

Then there was an idea that it will get us fiscal dividend because the notes in circulation would come down, money supply will also come down and the entire reward will go to GoI. But the money in circulation went back to the same level within a year of demonetisation, costing government dearly in terms of fiscal planning as they were overconfident. This was a negative economic impact for sure.

Therefore, in terms of rating, I would say there was no economics to it. But impact both in terms of overstating the capabilities of economic administration and being misguided on fiscal positives did cost India and the exchequer dearly.


Should it be seen as a game changer?

It hasn’t been a game changer clearly.


What are the unfinished agenda?

If you take the views of Arthkranti on what is wrong with Indian economy and monetary policy, then their proposal was – if you compare India with some of the other economies of the world, in India over 60 per cent of the total cash floating is of high value denomination currency which was ₹1,000-2,000 whereas in the US high value — $100 -- was held by only 20 per cent.

So the thesis was that this is happening because high net worth people had lot of black money which was held in cash and if you are able to successfully demonetise that black money plus introduce at the same time a virtual and electronic bank payment system for transactions in currency, then we would be able to actually penalise those with black money and make stocks of black money redundant. When demonetisation happened, even they were also disappointed.

If you ask the question today, has malfeasance due to black money reduced, then the answer is an emphatic no because the drivers of black money are not all bad like Hindi films characters.

In a country where informal sector is 80-90 per cent, you are going to get a high volume of cash and black money transaction. Also, economic corruption is of high volume, so you have to make structural changes. It won’t happen through technical solutions because the problem is political economy: it happened as is evidenced by electoral bonds saga.