Former RBI governor Raghuram Rajan on black money, demonetization: Clever find ways around it

Former RBI governor Raghuram Rajan shared his views on demonetization and black money two years ago.

New Delhi, Nov 11: At a time when we are talking about black money and demonetization, former RBI governor Raghuram Rajan threw great insight into these burning issues two years ago.

At an interaction after delivering the Lalit Doshi Memorial lecture in August 2014, Rajan, hailed as one of the finest economists of our times, said, "My sense is the clever find ways around it. They find ways to divide up their hoard into many smaller pieces."

This is what Rajan said about demonetization:

Question: RBI's proposal to phase out old notes which do not have the year printed. Suggestion - a: Replacing old currency notes under a new series. b: Also consider adding new series of Notes with Rabindranath Tagore, Homi Bhabha, et al.

Response: I am not quite sure if what you meant is demonetise the old notes and introduce new notes instead. In the past demonetisation has been thought off as a way of getting black money out of circulation.

Because people then have to come and say "how do I have this ten crores in cash sitting in my safe" and they have to explain where they got the money from. It is often cited as a solution.

Unfortunately, my sense is the clever find ways around it. They find ways to divide up their hoard in to many smaller pieces. You do find that people who haven't thought of a way to convert black to white, throw it into the Hundi in some temples.

I think there are ways around demonetization. It is not that easy to flush out the black money. Of course, a fair amount may be in the form of gold, therefore even harder to catch.

I would focus more on the incentives to generate and retain black money. A lot of the incentives are on taxes. My sense is the current tax rate in this country is for the most part reasonable.

We have a reasonable tax regime, for example, the maximum tax rate on high-incomes is 33%, in the US it is already 39% plus State taxes, etc., it takes it to near 50. We are actually lower than many industrial countries.

Given that, there is no reason why everybody who should pay taxes is not paying taxes. I would focus more on tracking data and better tax administration to get at where money is not being declared. I think it is very hard in this modern economy to hide your money that easily.

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