Note ban most disruptive policy innovation since 1991: Former RBI Governer D. subba Rao. 01-07

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Former Reserve Bank governor D Subbarao today termed demonetisation as "creative destruction and the most disruptive policy innovation since 1991 reforms" that has helped destroy blackmoney.
"On November 8, the Prime Minister (Narendra Modi) and the Reserve Bank have demonetised 86 per cent of currency in circulation overnight, which is what is arguably the most disruptive policy innovation in India since the 1991 reforms," he said.

"Demonetisation, in that sense, is creative destruction.

But it is a very special type of creative destruction. Because what it has destroyed is a destructive creation -- blackmoney.

So, you can understand that demonetisation is creative destruction of a destructive creation," Subbarao said.

He was addressing an international conference organised by the Institute for Development and Research in Banking Technologies (IDRBT) here.

He further said demonetisation is "arguably" leading to a flurry of innovations in Indian financial sector by way of digitisation of payments.

"There are two perspectives. Extension of a global trend of financial technology which is upending the finance industry and discontinuous change in a low-income country from cash incentive economy to a less-cash economy. Either way, we will have disruptive innovations in India's financial sector," he explained.

Subbarao said that though cost and benefit of this demonetisation exercise is a very contentious debate, the subject of policy innovation is not contentious.


According to him, the country witnesses a lot of disruptive innovations in finance in payment system.
The model of traditional banking has access to low-cost deposits and has an advantage over other financial institutions, including fintech companies, according to the former governor.

"That advantage is going to be neutralised by the business model of these fintech companies which will beat onefficiency, service and trust," Subbarao remarked. 

He suggested the traditional banks should look into otheravenues to compete by tying up with these companies orpayments banks that are coming up.

He urged regulators to promote innovation and protectconsumers and preserve financial stability.

"On the one hand, they have to make sure the stabilityis preserved and on the other hand, they should regulatetightly that innovation is not scorched. This balance is avery difficult judgement call," he added.

On microfinance, he said the model has benefited millionsof low-income families in India, particularly in AndhraPradesh (before the state bifurcation).

He recalled that RBI was in a dilemma at the time of 2010crisis on whether to regulate the interest rates of MFIs andif so, what figure would be justified.

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Demonetisation Day 50: Black money kingdom has been shaken from its roots Sukumar Mukhopadhyay 01-01

I went about asking many people in bank queues and markets about what they had to say on demonetisation. They all agreed there was some inconvenience but they largely supported it. The logic behind this was that they were willing to suffer in order to get back at the hoarders of black money.

Writers and economists are all divided on party lines. The best and worst example being that of former Prime Minister and noted economist Dr Manmohan Singh calling demonetisation an "organised loot and a legalised plunder."

Opinions it seems depends also on personal dislike. Even Amartya Sen called demonetisation a despotic act. Sen also alleged that it is a breach of promise but little efforts did he take to clarify his position. P N Bhagwati has refuted Amartya Sen on this ground.

So we shall take a plunge into the matter and analyse each issue purely on the basis of its merit.

Rabi crop row- Some economists cried foul that the Rabi crop has been ruined. But actually when demonetisation started on Nov 8, this crop was already three inches high since the season starts from October.

Woes of the rural folk- Again, some critics are shedding tears for the village folk, saying that 80 % of the country's villages do not have banks. The percentage is possibly correct. But the conclusion that 80% of the nation's people do not have access to banking facilities is wrong. Look at what the Prime Minister said in his speech during Independence Day in 2012. Manmohan Singh, who was then the Prime Minister of India, had said that 50% of households have bank accounts.

Four years since then and after Jan Dhan Yojana, the percentage of households having bank accounts is likely to be much higher than 50%. It may be 70%. Economists trying to deride Modi do not realise that banks in small towns serve all villages around the small town. If the villagers can come to the town to go to school, college, market and see cinema, can they not go to the banks as well?

Black money and black economy- Black economy is different from black money, which is just a part of the larger economy. The total value of 500 and 1000 rupee notes is Rs 15.5 lakh crore.There is no reliable estimate of black economy which consists of land, real estate, jewellery and cash. Only the cash portion is black money.  Demonetisation is only against black money and not black economy. The criticism that demonetisation will not tackle black economy is, therefore, misplaced.

Unexplained cash deposits- This is the crux of the issue. Government had expected that Rs 4-5 lakh crore of cash in circulation would not come back. But this amount may not be more than Rs 1 lakh crore. How much of it will come back is not definite. Even if most of it comes, all of that will not become white. Income tax department will investigate and if the depositors are not able to explain, they can impose high tax and penalty which will, in turn, yield a high revenue. Apart from this, the department will get higher income tax on higher interest. So benefits from these will definitely accrue from next year onwards. The economy too will have more white money than black money. That itself is a transformation.

Fake money- An estimated amount of Rs 400 crore of fake money will be eliminated.

Property prices- Real estate prices have fallen and so the middle class has benefited. Mispricing of real estate had earlier stood on the way to entrepreneurship, global competitiveness and job creation.

Recession- Some economic activity which depended on payment by black money may slow down but soon they will resume momentum with white money.

Gold rush- Assumption that people will buy more gold is wrong as the gold or ornament merchants will not accept old Rs 500 and Rs 1,000 notes.

GST– Kaushik Basu's remark that GST is a better alternative than demonetisation is based on a complete misunderstanding of what the Goods and Service Tax is. GST deals with indirect tax. Most black money is generated in direct tax. And even in the developed countries like UK, Germany or Canada where GST exists, there is substantial evasion. 

Digitisation- A higher level of digitisation has taken place following demonetisation and it will improve the ease of business.

Therefore, the impact of demonetisation cannot be judged by merely how much black money has been rendered useless. We have also to take into account how much amount the income tax department can recover in raids, tax returns, penalties and other channels.

Even if black has got converted into white, there has been a transformation from black economy to white economy to that extent. The prosecution of the money launderers will send shivers in the spine of the black prospective operators. The corrupt operators will now be dreading. Corruption has been brought to the centre-stage for launching an attack aginst it, while all along black money and corruption had been taken for granted.  Demonetisation has had a transformational value on the psyche of people.

It is a fundamental reform in India. After decades of rhetoric, some real action has been taken. Demonetisation along with all other policies such as the Jan Dhan Yojana, Aadhar-linked payments, mobile banking, GST, the Income Declaration Scheme and the Benami Property Act will have a real impact on black money.

The kingdom of black money will be shaken from its roots.

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