I admit, I am a huge fan of Freakonomics radio and never miss their podcast (listening for the past year or so). I like the way host Stephen Dubner asks questions and doesn’t hesitate to put the guests in an uncomfortable situation during the interview process and in general always adds a different perspective to the topic at question.
Full disclaimer, I am did not live in India during Demonetization and quite frankly nor did Dr. Rajan.
So, this week Dr. Rajan was interviewed on Freakonomics radio and as with all things one of the topic discussed was the big Demonetization effort that happened in India 2 years ago. The nation was shocked at the sudden move and me personally thought that was a bold move and a much needed move to increase the tax base and make economy more transparent. Dr. Rajan did go on saying he was consulted and he had voiced his opinion strongly against the program for he was concerned about killing the parallel economy that runs on cash with people who do not even have bank accounts and also people would find a way of turning their stashed away money without paying taxes. He went on to say that the effort did destroy the economy of the cash transaction and 10-15 million jobs were lost in the process and a lot of them haven't been regained.
I agree with your comments Dr. Rajan but in what way will it be beneficial for the country to have 2 parallel economies? one formal where the government collects taxes and provides services with the money collected and other entirely out of the governments hand and no tax collected from that but only services availed? The question I believe Mr. Dubner failed to ask is about the widened tax base due to the Demonetization and didn’t the tax rates reduce in India overall? Also, what about the effect on counterfeit currencies and reduced naxalite activities (I am not talking of Pakistan supported terrorism in J and K)?, granted Mr. Dubner was interviewing Dr. Rajan with the point of view of the man who called the great recession of 2008 back in 2005 itself. Another point I didn’t really understand was when Dr. Rajan says the world has too many strong leaders and that somehow is bad for the world economy. Last one was Dr. Rajan claimed credit of his policies as RBI Governor for the current rate of inflation in India, I am not a financial expert but I thought when he was the governor the inflation was close to 7-8% and only in the last year or so inflation in India is 3-4%; Not even a paltry credit to the finance ministry Dr. Rajan?.
One last thing I believe Mr. Dubner should have realized is along with Demonetization came with couple of other tighter controls on financial transactions, which I personally can vouch has made a difference. Example: the sky rocketing costs of real estate in India took a grinding halt and things started to become more realistic.
Maybe I am wrong, if I am then I know the one person who will enlighten me :).
ps: I hadn’t heard him speak and I admit he has a great voice and now I know why media houses like NDTV love him.