26 Dec 2016 15:45 IST

‘Demonetisation in our present economic context is disastrous’

The effects will spill over into the first half of the next fiscal year, possibly even beyond:

The effects of demonetisation will be felt in the first half of the next fiscal year, and possibly even beyond, said Indira Rajaraman, former RBI board member and member of the 13th Finance Commission.

 

Will demonetisation cut down on black money and counterfeit currency?

The note scrapping was neither necessary nor sufficient to contain cash-fuelled tax evasion. The menace posed by black money is more a matter of the flow of tax evaded incomes each year rather than the stock from the flow in past years, and calls for a number of structural reforms, principally administrative reconfiguration of the process of income taxation. The forthcoming GST will help combat tax evasion, if there is routine information exchange between the income taxation and indirect taxation systems. There were better options to block counterfeit currency, than by crippling the economy. Counterfeit currency is a matter that has to be dealt with by the national security apparatus.

Will it impact the economy in terms of demand and GDP growth? Do you think its effect will be felt in the next fiscal?

This kind of a move would have made sense if the economy were overheated and there was raging inflation. In our present context, with excess manufacturing capacity and low investment, it is disastrous. Yes, the effects will spill over into the first half of the next fiscal year, and possibly even beyond.

Could this decision have been implemented in a better way?

Yes, of course. The provision for replacement currency has been utterly inadequate, and has led to avoidable stress. Introducing a new Rs. 2,000 note with a different shape and thickness, calling for reconfiguring ATM machines at this difficult time, is completely inexplicable.

Do you expect foreign investors to view demonetisation unfavourably?

They will certainly balk at the disruption it has caused, and the demand suppression. If they think corruption will come down in the medium term, that will be a positive. But for now, they will wait and watch.

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