Dr KC Chakrabarty, former deputy governor, Reserve Bank of India, headed currency management at the central bank before taking premature retirement in March 2014. Known for his frank and candid views, Chakrabarty explains to Geetanjali Minhas why he is a critic of demonetisation and its implementation.


PM Narendra Modi’s demonetisation move has been described as bold, historic but lacking in anticipating the fallout. Your views?

When you are not able to anticipate the fallout it cannot be called a bold or historic measure. You should be able to anticipate the consequences and tackle them. We must understand this is a regressive and anti-poor measure. The poorer you are, the more adversely it affects you. It also shatters your confidence in the governance system and the rule of law. If I give a deposit to the bank, I must get it back when I require it. The poor and the underprivileged are more subject to torture. The rich can have four accounts and withdraw Rs 96,000 but a poor person who has only one account, and if the bank or the ATM does not function, he is not able to draw the money. So the suffering is proportional to the poverty level.
Those standing in queues who say that though they are facing some difficulty yet they are happy with demonetisation may be standing on behalf of those people who have no time to stand in queues. For such people it is an employment opportunity and they are only going to appreciate it.

What will be its impact on black economy – and on white economy?

If the idea is to attack black money, 100% black money should have been affected [by the move]. As it is never intended for white economy, so zero percent of white economy should have been affected. But this is not case, because black money is more with the rich and white money is more with the poor and there are more poor people in the country. So this will affect less the black economy and more the white economy.

In an ideal situation, white economy should not have been affected but the nature of the measure is such that it is going to affect everybody. And in the process the poor will be adversely affected.

Some critics say the intention is good but implementation is very poor.

It is not implementation – the planning itself is wrong. Such measures have to be carried out with proper planning, that is, how I am going to mitigate the risk of the poor and the underprivileged getting affected. There has been no thinking in that area. If I have a Rs 1,000 note, the government promises it will give me back the equivalent value without asking. The bearer may be the lawful owner, a thief, a robber or a culprit, but the note should have equivalent value for everyone. Today that note is valueless and in exchange you cannot get anything immediately. Then who should believe in governance and rule of law if I cannot withdraw my own money?

The banks have never said, ‘no, you will not be able to withdraw your own money’. Only if a bank has become bankrupt, it is not able to give the money. But does this mean banks have collectively failed in the system? How much it will affect is a different issue. Definitely, this is not a good thing and if you continuously do these things people will not have belief in governance and rule of law.

To curb black money, what measures are needed, in which priority?

What is the source of black money in this country? The source and processes have to be affected. There are three primary sources of black money: elections, religion and administration. On elections, everybody is saying what has to be said; I don’t need to repeat that. As for religion, you can go to the Tirupati temple and donate Rs 50,000. The temple or the religious trust puts this money in its bank account and nobody questions. Why not charge 50% tax on that? If someone deposits Rs 50,000 in a Jan-Dhan account of a poor man, the poor man will be prosecuted.

As for tax administration, globally tax administration gives minimum exemptions and all salaries are on cost-to-company basis. All perquisites and facilities have to be taxed at market value. We will then see how honest our politicians, bureaucrats, public-sector employees are. We will prosper when everybody in society is taxed. When someone says my income is tax-exempt, others whose income is not tax exempted will hide their income. You want to adopt best practices of other countries but not in tax because politicians and bureaucrats have vested interests.

There have to be structural reforms in these three areas. You cannot choose to bring only one global best practice.

Was this the best step to weed out counterfeit notes? Do you think indigenously producing currency paper will curb counterfeit notes?

No, they will still counterfeit because they are not correcting the error. If someone brings adulterated medicine in the market, you don’t penalise the fellow who is manufacturing original medicine but the one who is manufacturing spurious medicine. But here you are saying that you will destroy good notes also. This is a law-and-order issue and it has nothing to do with security or currency management. Our problem is that the intelligence machinery is ineffective. Someone is counterfeiting notes, they are forcing notes inside the country, and you want to solve this by penalising everybody. Such measures will not stop counterfeit notes.

What would be the impact on the overall economy – in short, medium and long terms?

Everybody says there will be adverse impact in the short term; and there is no doubt on that. In the medium term, it depends on how we the people and the government respond and how we start working and redouble our effort, how we mitigate the adverse impact of demonetisation and how we can benefit out of it. It all depends on how people respond. In long term it [the situation] may become good, but since this is not supported by structural reform and a mechanism to kill the processes which generate black money, it will not give the desired result.

What do you think of digital economy? Some people doubt if the poor and the illiterate can participate in the new cashless ways.

The poor also access technology. But the problem with digital economy is that the cost of transaction is much higher. Following global standards, if we have to promote digital economy we have to make cash transactions costlier. Here it is the opposite. Cash transition is free but digital transaction is chargeable. Unless you reduce the cost of electronic transaction so that it becomes affordable to the poor, they will not go for it.

Secondly, with cash and physical economy, our transactions with banks are foolproof and safe. With digital economy, someone can hack your account, or something can go wrong with electronic transaction. Unless the bank can prove that the customer is at fault, he must get help without any question. Unless you bring this type of safety regulation in our digital transaction, it will not work.

Thirdly, there must be affordability, convenience and ease of operation – where the customer can operate without disconnection. Here the government is working in the reverse direction. The poor likes all things the rich like, but when you don’t want to give these facilities to the poor you say, ‘poor do not like them’.

Currency change has not helped countries anywhere in the world. Will it help India, the world’s sixth largest economy?

If this has not helped anywhere in the world, what is so special about India that it is going to help here? When the sun rises in the east for the whole world, will you say the sun rises in the west in India? I am only talking some logic and economics. I have nothing to do with the governments. They could have done it differently and not haphazardly. There are different ways to tackle black money and counterfeit currency. This is my belief and understanding of the subject, or I may not have information that other people have.

Meanwhile, banks are writing off debts of big-ticket defaulters like Vijay Mallya. What are the ramifications of that move?

Banks together have written off more than Rs 4 lakh crore in the last 15 years. If a borrower does not pay back, the bank has no other way but to write off the loan. You must have a policy on writing off the loan and it needs to be implemented uniformly for all borrowers.

Secondly, the write-off must be transparent. I am not against write-off but against technical write-off. There is no policy and only rich people’s debts are written off following this route. This technical write-off is damaging the banking system. They must declare whose loan they are writing off, how much they have written off, why they have written it off and if these assets are backed by real assets, why they are written off and as per which policy they have written off and if this policy is uniformly applied to the rich and the poor. And if there is no policy, this will create more NPAs, because if you do not have a uniform policy of writing off a bad loan they will be misallocating your resources and mispricing the risk which will create more NPAs.


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(The interview appears in the December 16-31, 2016 issue of Governance Now)