In implementing demonetization what did not go as planned was that “a lot of bank officials really played it in the way that they should not have played it” and it was on a scale not anticipated, according to Arvind Panagariya, vice chairman of Niti Aayog.
He defended the demonetization of the Rs 1,000 and Rs 500 notes calling them a part of an overall strategy to fight black money and to introduce developments like digitization of currency.
“Remember this was not a step taken in isolation,” he said. “It sent a very strong signal, ‘Look the government’s strategy is to combat the black money’.”
He was answering students’ questions after a lecture on India’s economic policy and performance organized by the Deepak and Neera Raj Center on Indian economic policies at Columbia University’s School of International and Public Affairs.
“It is a gigantic operation,” he said. “Those who have been critical of the RBI have not understood what a gigantic task it was to remonetize the economy.
“The money that was completely out of the system, a substantial part of the cash that was in circulation was not in circulation, was not in the formal economy,” he said.
“A lot of these the RBI (Reserve Bank of India) knew was not coming through the banking system at all. So they all needed to come back.
“Demonetization sends a very, very strong signal that the day when the central government was complacent was over, that if you are going to misbehave we are going to see to it that you pay for it,” he added.
The demonetization is being followed up by a number of other things like restrictions on contributing funds for elections, and “the digitation of the transactions, big time,” Panagariya said.
“So all in all it was a necessary step in the process.”
He also praised the RBI for the “admirable role” it paid in keeping the rupee stable in November through two international developments – Brexit and the election of Donald Trump as the U.S. President – that made an adverse impact on most developing country economies.