Will ban on Rs 500, 1000 notes end black money menace? Here is what Raghuram Rajan had to say

The decision is aimed at curbing black and unaccounted money stashed in coffers

The Narendra Modi government on Tuesday announced its decision to withdraw the old Rs 1000 and 500 notes from the economy. The decision has created a lot of buzz about what will happen to the money that the consumers have in store.

The decision aimed at curbing black and unaccounted money stashed in coffers, is not something new. Demonetisation has been one of the talking points to curb black money for several years.

At an event in the past, the same question was posed to the then Reserve Bank of India Governor Raghuram Rajan over whether demonitisation is an effective step? Here is what he had said back then.

He had said that people who store money do not necessarily do it in the currency form and are in fact “clever” enough to convert it into gold or other ways.

“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,” he said.

Instead, he gave the suggestion that the focus should be more on the incentives to generate and retain black money.

“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 into 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,” he added.

Even though all black money may not be restored, people having unaccounted currency are sure to have sleepless nights with the government’s demonetisation decision.