September 5, 2018

India Shoots the Wrong General in Lost War on Cash

When there’s no trick left to defend a spectacularly failed experiment, blame Raghuram Rajan. 

If India’s top policy think tank is to be believed, the reason economic growth faltered last year, reaching 5.6 percent in the June quarter after 7.6 percent nine months earlier, had nothing to do with the November 2016 ban on 86 percent of the country’s cash.

The decline had been in the making since early 2016 because, under Rajan’s governorship of the Reserve Bank of India, the central bank devised “mechanisms to identify stressed and non-performing assets, which is why the banks stopped giving credit to industries,” Rajiv Kumar, vice chairman of state-controlled NITI Aayog, said on Monday.

The political compulsion to defend demonetization is understandable. Recent central-bank data showed that 99.3 percent of the currency made worthless was eventually returned to banks. To the extent one of the stated goals of the exercise was to immobilize so-called black money – wealth that dare not join the formal banking system because it’s ill-gotten – the draconian experiment came a cropper.


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