Kenneth Rogoff, professor of economics at Harvard University, a chess grandmaster and author of ‘The Curse of Cash’, says it will take years to understand the full implication of demonetisation in India. He says it has been politically popular and the government should use the political capital for more reforms. Edited excerpts from an interview with ET.
In India, there is a debate on disincentivising cash. What do you think about it?
My proposals look to lie on the lines of eliminating the size of cash transactions as they do in Europe, wirings cash registers which disincentivises cash because it is harder to evade taxes and the idea I focused the most on to eliminate very high denomination notes, which you don’t have in India, in order to make it hard to hoard cash, port cash, and hide cash.
The primary things the Indian government wants to do is to improve the other options, to make other things attractive. But there is certainly a question of whether real estate transactions should be done in cash. They may be able to deal with this through GST by saying you have to produce a document that may make it somewhat more difficult but I would favour making very large cash transactions not legal. Many European countries have this already. So you can’t buy a house in cash.
What do you think of cash transaction tax? This has been deliberated in India.
No. It was done in Mexico. Mexico did a cash transaction tax that had some effect on increasing tax revenue. I haven’t studied it closely. I think they put a 2% tax on cash transactions.
And they said it actually had a significant impact on tax revenues that people were reporting. There are lots of ideas around. I have not studied India or emerging markets enough to know the subtleties of the options. I have only looked at advanced economies where it’s more straightforward. So many more cash transactions here, you can’t lightly interfere. It’s still 70% of of all transactions in value terms. You don’t want to bring down the economy with some change like this.
Do you think the demonetisation experiment has been successful?
I think it’s clear that economic growth fell although probably not by a lot. It’s also clear that most of the black money has been recycled into the system without being taken. I think it’s clear the informal economy contracted more although we can’t measure it. On the other hand, the broader facts on, say, increasing the digitisation of the economy. Increasing compliance with the goods sales tax, affecting the use of cash more broadly in the economy. It will take a few years to know. It does seem to have been politically very popular.
So, a question is how the Prime Minister will use this political capital. Very narrowly, if the checkbox is only to include what did it do to output and what did it do to seizing black money – it led to lower output, not much black money was seized but there may be indirect effects that were also very important that might have been positive. It will take years to evaluate.
One consequences is financialisation of the economy, the shift towards financial assets. Is that not a positive?
Yes, absolutely. So that’s one of the questions (success of demonetisation). It’s just hard to evaluate right away.
Also, you are doing GST, which is actually a much much bigger policy than demonetisation, and there are those who argue that demonetisation has helped with knowing where cash is, helping understand how to enforce the GST even if they could not grab the money; they saw where bank accounts were; they gained a lot of information that will be useful. It will take many more years to know what happened.
You have talked about political capital of demonetisation. Where can it be used?
There are all sorts of areas like labour reforms, infrastructure but also in more ways of fighting corruption. India has shown tremendous commitment to fighting corruption, to enforcing taxes but if you don’t follow it in other way then the political capital is wasted.