Demonetization was not required at all, says Manmohan; Jaitley believes principal objectives achieved

Arun Jaitley defends demonetization even as Manmohan Singh slams it for economic downturn.

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Demonetization was not required at all, says Manmohan; Jaitley believes principal objectives achieved
Manmohan Singh-Arun Jaitley


Former Prime Minister Manmohan Singh today said the economy is on a "downhill path" because of the "adventure" of demonetization undertaken last year which was not required at all, either technically or economically.

Singh, a renowned economist considered to be the architect of the reforms of early 1990s, said demonetization has not been successful in any civilised country, except some of the Latin American nation. "I don't think demonetization was at all required... I don't think it was technically, economically necessary to launch this adventure," he said at the Indian School of Business (ISB) Leadership Summit here when asked if the note ban decision was the right one.

Prime Minister Narendra Modi had announced on November 8 last year scrapping of Rs 500 and Rs 1000 currency notes. He said the process involved withdrawing almost 86 per cent of the currency from circulation and "there was bound to be fallout which we are all seeing." Singh made a speech before answering a few questions at the event. "The economy has slowed down as I had projected a few months ago as a result of demonetization and also the fact that demonetization has been accompanied by the GST, which is a good thing that we have done in the long term. But in the short term, there are glitches that need to be resolved.

Therefore, the economy has experienced a downhill path," he said. He said the GDP growth was much higher in the last quarter of 2016-17 than the first quarter of this financial year. There are certain things that need to be done immediately, Singh said. "When we were in office, investment rate in the economy was 35-37 per cent but now it is less than 30 per cent. Private investment in particular is not growing," he said. He added that India needs much more investment in public sector "but we cannot rely exclusively on public sector realise our development initiatives. We must also simultaneously work on a foreign exchange situation." Singh, who had served as the country's finance minister over two decades back, said growth cannot take place at a high rate if banking system is not performing its task of providing money to entrepreneurs and to others who need to invest in our economy.

Note ban was a shake-up, achieved its main objectives: Jaitley

Finance Minister Arun Jaitley on Friday said demonetization was a shake-up which achieved its "principal objectives" of decreasing cash transactions, expanding the tax base and increasing digitisation. "Confiscating" the money was not the aim, he pointed out. "Demonetization was certainly a shake-up," Jaitley said at the Bloomberg India Economic Forum in Mumbai. 

"I think the demonetization debate in India actually is being held at two different levels. The first level was 'there's an inconvenience caused, there are queues which have come up'. "(The second argument being) 'Oh the money has come back into the system'. But that was the whole idea. The idea is not to confiscate money," the finance minister said. "The idea is to make sure that this anonymous cash operating in the system itself becomes a part of the system," he said. There were three principal objectives besides the big picture that we wanted to shake and break the Indian normal.

We wanted to create a new Indian normal," he said. While announcing the decision to ban Rs 500 and Rs 1,000 notes on November 8 last year, Prime Minister Narendra Modi had said the move was aimed at reducing black money, checking counterfeiting and curbing extremism. Referring to the "principal objectives", Jaitley today said note ban helped reduce the reliance on cash, particularly high denomination currency. "In the first round itself we have managed to squeeze a significant part of it (currency)," Jaitley said.

It also helped increase the tax base as the anonymity associated with the cash was no longer available, he said. "A lot of people had to (come into tax net) because once you put money into the banking system, the anonymity of cash was lost. Cash got identified with its owner," he said. On digitisation, the third "principal objective", Jaitley said digital transactions have "multiplied" and digitisation has now become "centre stage agenda of economic governance in India"​


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