There Were Better Alternatives to Demonetisation: Raghuram Rajan

“I felt the likely short-term economic costs would outweigh the long-term benefits,” the former RBI chief writes.

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There Were Better Alternatives to Demonetisation: Raghuram Rajan

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Ever since demonetisation was announced on 8 November 2016, the role of the Reserve Bank of India (RBI) in recommending the decision has been up for debate. The central board of the RBI approved the decision in keeping with procedure. But was the RBI fully on board? Did Governor Urjit Patel support the decision? And had former Governor Raghuram Rajan cautioned against it?


The answer to that last question is now in public domain. In his just released book ‘I Do What I Do’, Rajan writes that he had been asked for his views on demonetisation. In an oral response, he had communicated to the government that the short-term economic costs of such a move may outweigh the long term benefits.

“I was asked by the government in February 2016 for my views on demonetisation, which I gave orally,” he writes

Although there may be long-term benefits (of demonetisation), I felt the likely short-term economic costs would outweigh them, and felt there were potentially better alternatives to achieve the main goals. I made these views known in no uncertain terms.

On 30 August, data released by the RBI showed that most of the currency that had been demonetised was returned to the system. Rs 15.45 lakh crore in notes had been scrapped. Of this, 99 percent or Rs 15.28 lakh crore has returned to the system. The data once again brought into question the merits of the move, which was intended to root out corruption and black money from the system.


Rajan writes that the RBI was asked to prepare a note on demonetisation, which it did. The note outlined the potential costs and benefits of demonetisation, as well as alternatives that could achieve similar aims.

If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed, and the time that preparation would take. The RBI flagged what would happen if preparation was inadequate.

Data released by the government over the past few months shows that demonetisation may have hit economic growth. GDP growth in the fourth quarter of last year fell to 6.1 percent, and then further to 5.7 percent in the first quarter of the current fiscal. While demonetisation alone may not have pulled down growth, it left an imprint on sectors like construction and financial services.


Rajan added that the RBI was not asked to make a final decision during his time even though the deputy governor in-charge of currency affairs was asked to attend meetings of a committee set up to consider demonetisation.

“At no point during my term was the RBI asked to make a decision on demonetisation,” Rajan said.

(This article was originally published in the BloombergQuint, and has been republished here with permission.)

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