Noteban causes shift in investment pattern: Acharya

Will take years to understand outcome

The November 8 note ban has seen a shift from investment in real estate and gold to investment in financial instruments, Reserve Bank of India Deputy Governor Viral Acharya said on Saturday.

Speaking at the Delhi Economics Conclave here,  Acharya said, although it would take many years to understand the outcome of demonetisation.

Acharya was the moderator of one of the sessions in the Conclave where his key speaker Kenneth Rogoff, a Harvard University professor and former IMF chief economist pointed out that demonetisation was flawed as it phased out high denomination notes overnight.

“Indian demonetisation was flawed in some respect. My book, ‘The Curse of Cash’, argues for taking five to seven years to phase out big bills. India did this almost overnight,” he said.
“Few people realise that it takes six months to one year to print a new currency supply due to technical difficulties in producing counterfeit resistant currency. India’s biggest problem was that it did not have nearly enough new notes in hand to exchange the old ones,” Rogoff said.

He said it was important to move slowly on demonetisation to avoid collateral damage.
Acharya, however, argued that the recent Indian experiment showed that savings appeared to have a pretty non-linear shift since November and December. The savings, he said, diverted to mutual funds, structured investment programmes. Acharya said insurance premia collections over the past 7-8 months were on the rise.

The RBI Deputy Governor said people earlier had a very clear intention to invest black money in real estate and gold which they realised would not be possible now.

According to Rogoff, India’s biggest problem was that it did not have “nearly enough” new notes in hand to exchange the old ones.

Some countries had approached demonetisation in a better way like Europe, phasing of  €500 notes, Singapore’s discontinuation of $10,000 notes and Australia on discontinuing $100, he said.

Rogoff said it would take years to judge the full impact of India’s demonetisation move in accelerating electronic payments. “The larger picture is that the government has done much to promote financial inclusion,” he said.