K.C. Chakrabarty, who was deputy governor of Reserve Bank of India (RBI) between June 2009 and March 2014, said that there was no economic rationale behind the ongoing demonetisation drive and that such a proposal had been floated in the past too. Excerpts from a conversation:

What is your view on the ongoing demonetisation exercise?

It has no economic rationale. It does not serve any purpose.

Why do you say so? The government claims that the move is aimed at curbing black money…

What is black money? No notes are black. All notes are white. It is the process that creates the black money. When a person does not pay tax, it becomes black money. Here you are killing the notes and not the fellow who is not paying tax.

The government also argues it will address the issue of counterfeiting…

If you buy a kilo of rice, there will be some small stones (interspersed). What you do is remove those particles and not the entire rice. The law enforcement authorities should identify those notes and take action. Here people are standing in the queues to get their own money because there are inefficiencies with the income tax (process), police machinery etc.

I am not aware of the thinking of the current government… I don’t know what information they have. I don’t know if they have the information that 90 per cent notes are counterfeit. I do not have this information. If they have the information then they should tell the people. They must disclose, per million pieces of Rs.1,000, how many counterfeit notes there are.

You were the deputy governor of RBI when the UPA-II government was at the centre. Was there any such proposal from the government during your tenure?

Yes, it had come from the UPA government. After examining the proposal, we had said that this should not be done. The proposal never went to the board level.

Was it a formal proposal? What was the reason for declining it?

Whether it came officially or over telephone, is not the issue. But I definitely remember it had come. We said ‘no’ because it does not serve any purpose… the cost is high and the benefit is less.

It has already impacted the banking system. For the next couple of months, banks will only concentrate on exchange of notes, no business can happen.