Former RBI governor Raghuram Rajan said he would not recommend other countries to take a similar move after India's failure to clamp down on illicit cash
India’s 2016 move to demonetise 500 and 1,000 rupee notes “created more problems” than it solved for the largely cash-based economy, according to Raghuram Rajan, the former governor of the Reserve Bank of India.
At the time, the Indian government said the move would help clamp down on the use of illicit cash to fund illegal activities.
But, according to Rajan – who was the RBI’s governor from September 2013 to September 2016 – said that he believes the Indian government miscalculated.
The Indian government believed the move would force people to declare their earnings, which could then be taxed.
“The problem is that many of these notes are used for household and small savings, typically by a housewife, as well as by vegetable sellers and others in informal transactions,” he said at a Mastercard event in Barcelona last week.
“Turns out, when you do this, people who have money in their basement don’t go to the government.
“What they do is a find a local tout, who will find 20 or 30 young boys to open accounts. The net effect is that the government didn’t collect very much on taxes,” he added.
Statistics from India’s Central Bank indicated that 99 percent of the illegal cash made it back into the country’s banking sector. The move always caused severe cash shortages and led to protests and strikes against the government.
“Unfortunately, a lot of the informal sector didn’t have the ability to go cashless,” Rajan added. “The message for countries thinking of doing it? Don’t.”