Here’s What These 5 Ex-RBI Governors Have To Say About Modi’s Demonetisation Drive

It is a historic moment. There is bound to be paradigm shift in the economic and political system. With the GST on the anvil, the system is ripe for a change. However, to take it forward, contract enforcement and judicial processes will have to play active role. It is impossible to have a big change without some inconvenience and some temporary disruptions.

The government’s move to withdraw Rs 500 and Rs 1,000 notes is a standard prescription in extinguishing unaccounted money. This has been tried in the past. But the government (this time) had three targets: those who accumulated money, who issue fake currency and those financing terrorism, the last two being of different nature. But as far as black money is concerned, this measure is a step towards reducing black money or unaccounted money from the system. It will affect the retail trade as most of the transactions are done using cash. There are some other sectors in the economy like real estate, jewellery where cash has become a major player for transaction. Those will undergo a fundamental change.

If you ride out the short-term pain, the positives will be substantial, be in terms of attracting investments, and also getting people to move from physical cash to electronic transactions. The money being deposited in the banks, as against having it in the pocket, or under the pillow, was good for the economy.Banks will multiply the money when it is with them. It will encourage banks to get lending rates down, even if the RBI does not ease any further…. demonetization will also help improve financial inclusion... banks will be able to give out more credit and all this will have a multiplier effect.

In the past demonetisation has been thought off as a way of getting black money out of circulation. Because people then have to come and say “how do I have this ten 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.They find ways to divide up their hoard in to many smaller pieces. You do 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 demonetization. It is not that easy to flush out the black money.

It is very positive and good for us in terms of what the intention is. And over a period of time as I think he also mentioned that it will be easy to see what else needs to be done to make it available, make it accessible to the people who do not have bank account and let us hope it works out. The most crucial issue at the moment is how to increase the spread in the banking system that is the most crucial issue. The second related most important issue is that in rural areas or in semi-urban area where there are no banks accounts for the poor or for the agriculturists and, then what is to be done with their notes if they do not have a bank account.