New Delhi: Former chief economic adviser Arvind Subramanian in a forthcoming book has called demonetization a “massive, draconian, monetary shock" and hinted he was not consulted on the matter.

Subramanian also bats for RBI deploying part of its excess capital of 4.5–7 trillion in recapitalizing public sector banks under agreed principles with the finance ministry.

Titled Of Counsel: The Challenges of the Modi-Jaitley Economy, the book deals mostly with policy decisions and their impact during Subramanian’s tenure of less than four years at the North Block.

Subramanian does not say in as many words that he was not consulted on demonetization but drops enough hints—such as his analysis being based on “publicly known facts" and that he watched the “dramatic" nationally televised speech of PM Narendra Modi on 8 November “in my room in North Block" when 86% of the currency in circulation was invalidated.

“The Indian initiative was, to put it mildly, unique. It presupposed an extraordinary amount of resilience in the economy, especially amongst the vulnerable, because it was going to be the first of two major shocks—along with the GST—to affect those in the cash intensive, informal sectors of the economy," Subramanian said.

On why demonetization was popular politically even if it imposed economic costs, Subramanian concludes that in some cases, at least where there are charismatic leaders, policy actions that adversely affect more people are more likely to succeed than actions whose impact is confined to a narrow few. “Apparently, they find it difficult to take on, say, PSB unions, entrenched bureaucrats, or rich farmers, but less difficult to take on the entire informal sector," he added.

Reacting to Subramanian’s revelations, Congress president Rahul Gandhi wondered why he did not resign when he disagreed so much on demonetization. The Congress party tweeted: “Obviously criticising a decision by the Supreme Leader while in govt. would’ve been completely outside the realm of possibility."

Joining the debate between the RBI and the finance ministry over fixing the economic capital framework of the former, Subramanian said RBI needs to be held accountable on the “swelling size" of its capital base. “It holds about 28% in capital, which is the fifth largest amongst all major central banks. Two of the four above India are oil exporters, which are special cases because these countries are highly vulnerable to the swings in the price of petroleum," he wrote.

Arguing that RBI has set for itself a risk tolerance that is “ultra, ultra conservative, almost bordering on paranoia", Subramanian said whereas other central banks want to cushion against events with 1% probability of occurring, the RBI wants to cushion against events that can occur with .001% probability.

On RBI’s objection that redeploying excess capital amounts to the government raiding the central bank, Subramanian seeks to strike a balance arguing that this capital should not be used for routine financing of fiscal deficit and should be done only after extensive consultation.

“A clear rule, enshrined in law and agreed upon by the central bank and government, could stipulate that the government will never allow the central bank capital to fall below a jointly agreed threshold. That way, the benefits of excess capital can be reaped without compromising the integrity of the central bank’s balance sheet," he added.

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