Rajiv Kumar, Vice-Chairman of NITI Aayog, actively supports demonetisation as a concept and finds no wrong in the decision of the Narendra Modi government. Terming the decision as ‘draining the swamp’ he says it is one of the ways to cleanse the rampant black money culture. But Kumar, who prefers to see himself as someone firmly rooted in the Indian political economy, acknowledges that such decisions come at a cost which are well below the gains achieved.

In fact, in his book Modi and His Challenges , written in 2016, Kumar had spelt out the problems faced by the PM in taking India towards its desired goal of becoming a prosperous economy by 2047. In conversation with BusinessLine , Kumar said “it is not right to prejudge the impact of demonetisation on GDP. The economy is readjusting itself to the new structure...such adjustments take time.” Excerpts:

It’s a year since the government opted for demonetisation. Do you still believe it was a right decision, given its impact on the GDP?

I still stand by my views on demonetisation. It is a decisive attack on the whole culture of black money. You can say it is draining the swamp. Yes, there has been an impact on GDP. But a major decision like this comes at a cost. The process of changing the culture of illegality is slow but it is happening. It is wrong to say that all blackmoney has turned into white. It has turned grey. The dubious money is now sitting in bank accounts that are under scrutiny. See for example the changing process in defence and real estate. Yes, economic activities were impacted by this. But this was because the economy was readjusting itself to the changed structure. Today dishonesty is not incentivised.

But how do you assess the success of demonetisation, considering the RBI is still counting the currency?

This is a constant question. How much has come in? Why don’t you see it like this — there are 18 lakh accounts, of which 13 lakh accounts have been identified and are under scanner, about 4,000 accounts have already been acted against by the government. These have yielded ₹5,000 crore. The whole process has sent a strong signal to all that there is no scope for such activity.

Some critics say — won’t dumping the currency have sent a stronger message...

If the government had instructed something like this it would have created a ripple (smiles), created a thrill, but would not have achieved the desired impact. Things have to be done step-by-step.

Debate has also taken place on the frequency of demonetisation and whether the government should do away with high-denomination notes (₹2,000). As an economist what will you propose?

Not demonetisation, but currency replacement can happen if, say, the government wants to shift to all-plastic instead of paper, or to make certain changes in a particular denomination. As regards the higher denomination currency, I would think a better idea is to do how it is done in the developed world — link it to per capita income. In the US, the highest denomination is $100 when the per capita income is nearly $40,000. We have to similarly calibrate our currency.

Hasn’t GST impacted the consumption pattern?

We have to see everything in a perspective. See what kind of economy we want. Do you want to be Japan or you want to be Brazil? India should target Japan, where the set-up is aimed at larger growth of the middle-class. The Japanese society has far less inequality and yet prosperity for the middle-class.

GST has impacted the consumption demand, but of luxury items, not rural consumption.

The rural economy has not been impacted because agriculture has been out of income-tax net. Success will come about if this move leads to replacing consumption demand with investment demand.

To clean up the economy there have to be major reforms in the taxation structure. The government has taken a major initiative in indirect tax reforms (GST). What about direct taxes?

Yes, I agree. But credit to this government that it has taken the initiative of cleansing a termite-ridden system that was never touched by successive governments earlier. Today, the tax system is far more transparent.

For direct tax also there is everything online just as is the case with indirect tax now. More will happen.

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