In an exclusive interview to CNBC-TV18, from the sidelines of the Delhi Economics Conclave, Kenneth Rogoff, Professor-Economics, Harvard University spoke about his book 'The Curse of Cas' and also shared his views on India's demonetisation drive.
Below is the transcript of that interview
Q: You have written about curse of cash and the best example is that the Indian government took your writings seriously and went in an announced demonetisation – In one of your pieces written after demonetisation, you have said that it is different from what you have argued for in your book which was basically based on the developed countries’ where maximum number of people have banking facilities – you also argued that high value notes should be done away with completely. In that case India brought in the Rs 2000 note which is much higher than what they had phased out. Net-net 7-8 months down the line how do you read the situation because you have added a new chapter in your book now on India?
A: I did add a new chapter about India though it is still evolving. The first thing is that my book is about advanced countries, it has quite a bit on India, things India has done but I said if you are a developing country don’t try this at home because of the financial inclusive issue – specially the fact that cash is so broadly used.
The single biggest thing that India did that was different than my view of how it should be done, was to do it overnight. I said do it over 5-7 years because you want to avoid collateral damage – many of the European countries did when they changed from national currencies to the euro.
The thing which isn't obvious unless you study it, is it takes a long time to print currency and everyone in India knows this now. It is not that you can do it in a week. So, they didn’t just remove the large denomination notes or exchange them– they didn’t have the new notes ready. So the country went through this traumatic period when the economy was demonetised, a lot of that has come back. There are also other issues like the speed at which it was done, there weren’t any super large denomination notes in India, the largest was maybe USD 15 – my book says USD 50 and above or equivalent maybe in 10,20,30 years going to lower denomination notes.
However, that said in the Indian context, there are many other things going on for example the biometric identification that provides financial inclusion that is way ahead of the world, and I think a world has a lot to learn.
Q: So are you saying that demonetisation should not be seen in isolation and it needs to be seen in the context of what else the government is doing?
A: Absolutely, you have to look at the picture of everything that the government is doing to discourage the use of cash, to bring more of the informal economy into the formal economy, the goods and services tax (GST) is obviously a huge thing that will ultimately provide better jobs and make the economy more efficient.
If you look at isolation at demonetisation, I don’t think there is any question that it hit the informal sector very hard, there were knock-on effects to the formal sector and if you did it more slowly those would have been less.
Q: I was speaking to Professor Jeffery Sachs and he said that demonetisation will become a case study for economists for years and years to come
A: I thoroughly agree with that.
Q: So when you study what the government of India did and repercussions of that – what are the key takeaways when you propound this argument – what are the things you will say government’s if they want to experiment with something like this, some of the things to be wary of?|
A: In my book, I have mentioned the work of James Henry who in the mid-70’s suggested this idea of getting rid of large denomination, he was really the pioneer of this, he said to do it overnight for much the same reasons the government of India did – they wanted to grab the black money, have the tax inspectors look at everything and I argued this is not realistic. You are going to cause so much collateral damage, you will quickly pull back and find yourself just exchanging money as quickly as you can and I think we did see that in India.
It is remarkable that the effect on the formal economy was not greater. The numbers are hard to know till they settle down but it was less that people expected, we will never know the effect on the informal economy.
But the general theme is that you are not really going to be super successful in grabbing the black money, which you wanted to in going to a cash light or less cash society is make it harder to do big transactions in cash.
I do not favour going cashless, I think that is a bad idea – we need it for privacy, need it for small transactions but if you are buying a USD 40 million apartment in Trump Tower and paying cash, that is not because you just like using cash instead of an electronic transfer. Obviously, it is used in a lot of illegal activity, in India in political corruption, indeed in many places in the world.
I think what you want to try to do is regulate the use of currency a little better and I think a simple way to do is get rid of large denomination notes.
Q: Because it was done swiftly and as you said no country has done it in peacetime attempted what India has done – you had seen during the Second World War but that was national emergency in (the Americans did in Vietnam) but in India there was no emergency and need for it – so does it concern you that the merits of demonetisation, which would have been done slowly gradually over a period of time like EU countries did- doing away completely with high value note which the Indian government hasn’t in fact they have brought in a new note in higher denomination – somewhere the merits have become overshadowed because it was not executed properly that it is perhaps marred and sullied the entire experiment?
A: I think we will need years to say but one has to look at the larger picture of what the government has done- certainly politically, it was much more successful than perhaps it was economically, and maybe will energize other reforms, show that the government is really committed. I wasn’t consulted, this wouldn’t have been what I would have designed. So you can point at narrow ways in which it has been unsuccessful but in broader long-term, it may help to move the economy towards more digital transactions.
Q: So you are still keeping an open mind, while lot of people have given their views saying it has not worked but you are saying we need to give it time?
A: Of course, the problem of tax evasion, corruption in India are gigantic and to think about how this will have a long run effect is hard to know. How will it affect government’s other efforts, how it will affect political support for other efforts that the government undertakes. If this was popular- even if the economist who study it largely don’t agree maybe it will help lead to other things. This isn’t how I would have said to do it but it will take time to sort out all the effects.
Q: One of the arguments that government of India gave for not giving time and did a surgical strike on high value notes was they did not want to give those people hoarding cash time and give them time to slowly convert black money - does that argument hold?
A: James Henry's original idea in the 70’s was exactly that – he said we will just do it overnight some Sunday, we will have tax auditors waiting, and we will have the justice department waiting but the thing is scale of this is so big, that you will need to train an army of tax inspectors, an army of justice investigators. How are you going to do that in secret, you don’t have the infrastructure to seize all the black money. So what happens is you get a chaos, a lot of collateral damage and what India quickly did, and what the US would have done had it adopted James Henry’s policy was try to mitigate the collateral damage, not try to identify every person and everything and I think that is inevitable and it is not realistic to think that you can do it overnight and grab all the black money.
Q: So in your view India should have adopted a more gradual approach?
A: I don’t know what the total picture will be- India has lot of things going on at the same time and so we have to look at whole effects. But looking narrowly at this exercise and looking at the lessons for other countries, I think it’s definitely something to be considered doing over a long period, like Australia has been doing it slowly. Doing it overnight, you would have to justify it in some other way.
Q: What does it say about the political style of PM Modi, because John Chambers was on CNBC and he said that here is a man who is willing to take these bold decisions – look at what he has done with demonetisation, look at what he is trying to do with digitsing India therefore countries around the world must draw lessons – that here is somebody who is willing to bite the bullet?
A: In general when world looks at India, it looks like at a country is always moving forward but very slowly and sometimes in periods not at all. It is little frustrating because India has so much potential, so much intellect, so much dynamism and yet it hasn’t over some periods performed like it might. Surely, when I worked at International Monetary Fund and my successors as chief economist would come in and say, great job but you could do more.
I think giving a sense of energy, giving a sense that the government was committed, giving a sense that the government is really willing to take political risk is probably a good thing. So, I think that sort of lesson of trying to do things boldly, on the other hand of course if you can have a commission study something prepare the groundwork, make sure you are doing it right – a system that a technocrat like me largely supports also has a lot to be said for.
Q: Donald Trump is pretty much doing what he promised. On some issues he has changed goal post but on many of them he is sticking to his guns. He is still hopeful of the wall that will separate America from Mexico for instance.
A: It is hard to know when you are not getting anything done what it means sticking to your guns. I think the general impression is that he changes his position on most things, it is hard to know from one day to the next. Although on Russia it seems to have been very consistent which is suspicious.
Q: Politically back home because of the Russia connection and what it has exposed - his own son sort of being in touch with people in Russia to undermine many would say the US democratic system, with him politically weak at home what sort of a spiral effect do you see on his economic policies?
A: It is very hard for him to get anything done because even the Republican House of Representatives and senators don't quite know what to do. They don't know where they stand. The Russia issue is huge overhang over his Presidency. It is still spiralling downwards. So, the thing most likely to expect is that they have trouble getting anything done. As I said the mitigating factor for United States is that it is a pretty good franchise and we have had long periods where President and the Congress can't get anything done and the economy works. It is not as fair as it should be, it is not as productive as it should be, there are lot of problems but in the scheme of things the United States is still in an enviable position.
The biggest concern about Donald Trump is somehow that he might undermine institutions, under cut the strands of the United States. We have never really had a President challenge some of the things that he is challenging. How will Congress react, how will the Supreme Court react. I think so far it has been pretty encouraging that the checks and balances are working but we have only had six months.
Q: Talk to me little bit about Federal Reserve because we have seen now the interest rates going up and Donald Trump himself it appears to be in favour of higher interest rates. Going forward what do we expect? The consensus is that there could be another two or three more rate increases. What sort of an impact do you think that is going to have?
A: I think the Federal Reserve is likely to slow down a bit if inflation is not happening. We have this incredible situation where the share of labour is falling all over the world, wages have lot of downward pressure. If you have downward pressure on wages, it is very hard to have upward pressure on inflation. So, as long as that is going on and some day it will reverse, I think it is very dangerous for the FED to say inflation is around the corner, they will look silly and they have to be very careful.
That said, they can raise the interest rate a couple of times before it really has any significant effect. I don't think they are anywhere near overshooting. Another thing that Federal Reserve faces is they don't know what Donald Trump is going to do. Who is going to be the next Federal Reserve head?
Q: He hasn't had kind words for Janet Yellen either in the run up to the elections?
A: I think the most likely person to get appointed is Janet Yellen. That is not saying she is better than 50-50.
Q: So, she would be reappointed?
A: Yes. Many times Presidents have said the one thing I will never do is reappoint the head of the Federal Reserve and then they appoint them.
I think Janet Yellen represents a lot of things he should like because she is very concerned about employment and growth. I think it is hard to find someone more so who is as competent as she is. Also she represents continuity.
You just said Donald Trump wants interest rates to pick up, no he doesn't. Nothing he wants more than to keep interest rates low. If inflation goes up it has a lot of long run negative problems. However in the short run nobody really notices, they thing their wages are going up, they think output would tend to go up. So, it is a short run matter and he is going to be looking hard as the 2020 election comes up. Janet Yellen is going to be looking pretty good to him as an alternative. So, let us not rule that out.
For the entire discussion, watch video
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