Raghuram Rajan preferred other ways over demonetisation to tackle black money

Even as the government defends the demonetisation exercise amid growing opposition, it has emerged that former RBI governor Raghuram Rajan didn’t think much of it. He said there are other ways of tackling black money.

In August, at the annual Lalit Doshi memorial lecture, Rajan said, “I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past, demonetisation has been thought of as a way of getting black money out of circulation. Because people then have to come and say “how do I have this 10 crores in cash sitting in my safe and they have to explain where they got the money from. It is often cited as a solution. Unfortunately, my sense is, the clever find ways around it.”

On November 8, in a sudden announcement that took everyone by surprise, the government demonetised high denomination bank notes – 500 and 1,000 currency notes .

Rajan had said, “Black money hoarders find ways to divide their hoard into many smaller pieces. You find that people who haven’t thought of a way to convert black to white, throw it into the hundi in some temples. I think there are ways around demonetisation. It is not that easy to flush out the black money.”

Read | Taking out high-value notes can affect the stock but not the flow of black money

A fair amount of unaccounted cash is typically in the form of gold and therefore even harder to catch, said Rajan, adding that he would focus more on incentives that lead to generation and the retention of black money. There were a lot of incentives on taxes and the current tax rate in the country was for the most part reasonable, he added.

Under demonetisation, a currency unit is declared no longer legal tender. In such cases, the old units of a currency must be replaced with new currency units. This is usually done whenever there is a change of national currency.

Similar steps were taken when the European Monetary Union nations decided to adopt the euro as their currency. However, people were allowed to convert the old currencies into euros for some time to ensure a smooth transition.

Zimbabwe, Myanmar, Fiji, Singapore and Philippines among other countries too have demonetised currency.

Rajan had further said he didn’t understand why people didn’t pay taxes in the country, where taxes were lower as compared to industrial nations.

The maximum tax rate in India on high incomes is 33%. In the United States, it is already 39% plus state taxes, etc., taking it to nearly 50%.