Newly Appointed IMF Economist Gita Gopinath Says Modi Govt Screwed Up With Demonetisation

NEW DELHI –  The newly-appointed chief economist of the International Monetary Fund, Gita Gopinath, was a vocal critic of the Narendra Modi government’s demonetisation move, but called the Goods and Services Tax a ‘real reform’.

Gopinath said no macro-economist would recommend this prescription (demonetisation) for any developing or advanced economy, reported The Print Newspaper.

The Modi government’s demonetisation drive shook the Indian economy on 8 November 2016 by sucking out 86 per cent of the cash in circulation overnight.

In Walk the Talk, the 46-year-old economist called the drive unprecedented. “Not only unprecedented in terms of practice, it is also unprecedented in terms of theory. Because pretty much every single macro-economist colleague of mine, whom I have spoken to, would say that this is something that we probably do not recommend to any developing country,” said Gopinath.

“Even in an advanced economy, you wouldn’t do that,” said the John Zwaanstra professor of International Studies and Economics at Harvard University.

However, Gopinath added that India could move towards a less-cash economy, leaving more money in the banks, as a positive impact of the demonetisation drive.

“So, for demonetisation, I think the biggest plus has been the shift away from a cash-driven economy to a cashless economy. Maybe more parts of the informal economy become formal, but everything we know on this transition process is that it’s a slow one. So I don’t expect anything to happen very quickly,” Gopinath said.

Referring to the argument that more cash meant more corruption, Gopinath said Japan had the highest cash per capita, way more than India.

“The cash in circulation, relative to the gross domestic product (GDP) for India was 10 per cent, whereas in Japan it is 60 per cent. That is not black money, that is not corruption,” she noted in an interview to news daily Business Standard.

In the same interview, Gopinath underlined the implementation of the Goods and Services Tax (GST) as a favourable move and termed it a “real reform”. She said GST was a way of formalising the economy and ensuring tax compliance.

The time that was used to manage the aftermath of demonetisation should have been effectively used to roll out GST smoothly, she added.

Gopinath also criticised India’s central bank for its communication strategy during demonetisation.

“I think a few things that could have been done better would have been the communication from the RBI (Reserve Bank of India), even in real time, about how they expect things to play out, where things stand. So, there could have been a more regular communication with the public than has happened,” she said in Walk the Talk.

“There could have been more transparency in terms of how they thought this particular policy would affect the economy.”

Even as many raised questions on the role of RBI in the demonetisation drive, Gopinath said its governor Urjit Patel was “terrific” and his appointment made her happy.

However, the economist added that demonetisation could eventually benefit the Indian economy, six months or a year ahead.

In the interview to Business Standard, Gopinath said India needed to focus on data and its collation as gathering credible data is a tall task in the country.

“What needs to be done generally for policy in India is just better data. It’s not great when everybody, everywhere, seems to be suspicious of the GDP numbers,” Gopinath said.

She further pointed out that investment remained weak in India and this trend existed even prior to demonetisation.

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