After Prime Minister Narendra Modi announced the demonetization program in November of last year, India’s growth slowed to 6.1 percent in the first quarter of 2017 and moderated further to 5.7 percent in the subsequent three months.
Other than stalling growth, the move also failed in its aim to root out illicit cash, which had been believed to largely be parked in the now-banned 500- and 1,000-rupee bills.
The central bank said in its annual report last week that 99 percent of those notes were deposited or exchanged for new currency, suggesting that most people, including those who hoarded illicit wealth in cash, have managed to preserve their fortunes.
Rajan had previously said he was against demonetization and preferred other ways to tackle India’s “black money” problem, such as offering tax incentives.
But he also acknowledged that it is difficult to single out the program’s impact on the economy, as there are two other major dampeners on India’s growth: A high level of debt and short-term uncertainty caused by the implementation of the goods and services tax.
“Disentangling these three and talking precisely is difficult especially because, as a number of observers have pointed out, some of the effects (of demonetization) have not been measured,” Rajan said.
