Demonetisation Killed The Informal Sector, 10-12 Million Jobs Were Lost: Raghuram Rajan in new Freakonomics Podcast
"It was one of those places where more economic thinking would have helped.”
In the latest episode of the Freakonomics podcast, award-winning author, journalist, and podcast and radio host Stephen J Dubner and former Reserve Bank of India governor Raghuram Rajan have an in-depth discussion about various issues. In the episode titled “This Economist Predicted the Last Crisis. What’s the Next One?” Dubner brings up Rajan’s experience as the head of India’s central bank and also the move that followed just months after his departure from that position — the demonetisation drive.
Stephen J Dubner: Now, shortly after your departure as governor of the RBI, Prime Minister Modi executed a sudden, controversial plan to abolish 500 and 1,000-rupee banknotes, hoping to crack down on the shadow economy and tax evasion. I understand you had not been in favour of that idea, correct?
Raghuram Rajan: Absolutely. It didn’t make sense. I was asked for my opinion, and I said, “Look, it is taking away money that people use in transactions. It’s going to create enormous disruption unless we replace it overnight with freshly printed money.” And it’s very important that we have all that in place, difficult to maintain secrecy, and then the fundamental sort of objective of this, which was to get people to bring out the money that they hoarded in their basements and pay taxes on them — I said, “That’s probably not going to work out, because they’re going to find ways to infuse the money back into the system without paying those taxes.”
Stephen J Dubner: It’s been roughly two years now. What have been the effects of this demonetisation?
Raghuram Rajan: Well, I think more than the numbers suggest because India was growing at that time. And we had numbers which were in the 7.5 per cent growth range at that point, at a time, in 2016, when the world was actually growing quite slowly. When growth picked up in 2017, instead of going along with the world, which we typically do and we exceed world growth significantly, we went down. That suggests it had a tremendous effect on growth, but that, the numbers don’t capture it all, because what actually got killed was the informal sector — the people who were doing work with notes rather than with checks, who didn’t have formal bank accounts. And when you look at the job numbers that some private-sector people estimate 10, 12 million jobs were lost in that episode. And, of course, we haven’t recovered them yet. It was one of those places where more economic thinking would have helped.
Stephen J Dubner: Was it a coincidence that Prime Minister Modi went ahead with the plan only after you’d left?
Raghuram Rajan: Well, I can’t speak on that. I can only say that I made my objections very, very clear.
Stephen J Dubner: Some of your comments, as governor, were not well received by some members of the political class, and you did not seek a second term as governor of the RBI Could you just describe that decision for us, please?
Raghuram Rajan: Well, I think that was relatively straightforward. I had a three-year term that came to an end. I think we — the government and I — talked about whether I could be useful for a little more while. And I think we really didn’t agree on an extension. I mean, they didn’t want to extend it, and I didn’t, at that point, on those terms, want an extension.
Stephen J Dubner: Your name has been mentioned as a potential Prime Minister of India. What sort of probability would you assign to that?
Raghuram Rajan: Pretty close to zero. Look, I’m not a politician. That requires enormous capabilities in a very different direction, which I don’t have. I certainly will stick to what I know, which is advice and policy. If I can have some influence on public policy in the future, I certainly would think about it, but I’m perfectly happy where I am.