'Government Is Not Stupid': Economist Bibek Debroy On Notes Ban

New Delhi: For those who say that the new Rs 2,000 note will fail at making it harder to hoard black or undeclared money, economist Bibek Debroy has a short answer: "Don't assume the government is stupid." He also has another health warning: "Do not assume that Indians are stupid. They will figure out ways of circumventing it (the new rules on notes), and what the government is trying to do - is preempt it."

Mr Debroy, who is a member of the NITI Aayog or the PM's Policy Commission, said that the new 2,000 rupee note is necessary because "cost wise, a higher-denomination note is more effective, the printing costs are lower and it lasts longer."

Critics of the week-old ban on 500 and 1,000 rupee notes say that the sudden removal has hit the poor hardest since they transact entirely with cash, a claim denied by Mr Debroy.
 
The new Rs 500 notes were released days after the old notes were pulled from circulation; Rs 2,000 bills are are being given to account holders at banks and ATMs. Without enough Rs 500 notes in circulation and old Rs 100 notes running out quickly, people are left only with Rs 2,000 notes to offer at shops. It's impossible to get any change. So what is the point of such a high-denomination note, many have asked.

"The ATM can only stock a limited number of notes...so that is the reason 1 why you need higher-denomination (Rs 2,000), apart from 100 rupee notes. The second reason is, there's been inflation, so you do need a higher denomination note," said Mr Debroy.

Prime Minister Narendra Modi's radical move at demonetisation has been largely praised by financial experts. The government has said that the fact that the ban on the old notes was announced just four hours before they were declared invalid was essential to prevent those with black money from channeling their untaxed cash into buying assets like property or gold.

"This was an extremely, extremely secret operation. Not more than about 7 or 8 people knew about it," said Mr Debroy to NDTV. When asked if he was among them, he hinted, "Can you keep a secret? Because I can.''

The problem is that across the country, those outside the banking system have been left stranded without cash. Banks continue to witness round-the-block lines of people desperate to collect the allotted quota of new notes.

Right next to his office are the the teeming crowds outside the Reserve Bank of India; Mr Debroy has been carefully studying the crowds there and he believes that a majority of them are not trying to swap their old notes for new ones, but serving as proxies for others. That is partly why the government today said that indelible ink, the sort used for voting, will be marked on those who've collected their cash.

"Today's measure of indelible ink will take care of letting other people exchange cash,'' he said. In the first six days, over 45 billion dollars were deposited in banks as people turn in their old notes. "There is a short-term disruption in production but the gains are long term and helps cash lying around people's houses back into the system," said Mr Debroy.