The supply chains that have been temporarily disrupted due to the withdrawal of high-value currency notes last month will “recreate themselves very quickly” just as New Orleans in the USA was rebuilt after Hurricane Katrina in August 2005, according to Arvind Panagariya, vice chairperson, Niti Aayog.
Speaking at the Express Adda event Thursday evening, Panagariya said, “The supply chains, etc., that get temporarily disrupted will recreate themselves very quickly. I think of, for example, this hurricane that came to New Orleans and it looked like the city will never be rebuilt again and of course, New Orleans is back to life. And that is the history, actually, in many cities when they experience some gigantic shock like that. Eventually, they come back and rebuild themselves.”
Panagariya said that demonetisation was not an isolated move and that while the transition is painful, India would recover the loss in growth in the current quarter very soon.
“And ultimately, it is all a matter of incentives. People do react to incentives and as long as we go in and ensure that we recreate the incentives, which we will recreate when the liquidity is fully there in the system and better because a lot of the digital technologies would have also been adopted by then, at least by a significant proportion of the population. So I think in the longer run we will come out more stronger and further ahead,” he said.
On November 8, Prime Minister Narendra Modi had announced the scrapping of existing currency notes of Rs 500 and Rs 1,000 to curb corruption and black money. Modi had asked for 50 days, until December 30, for the situation to stabilise.
“The basic objectives of demonetisation will be achieved and much more. I never saw this move as an isolated step. There are half-a-dozen steps, which were taken prior to this. This being the biggest so far and I don’t think this will be the last one either. India has a long way to go in terms of setting policies right,” said Panagariya.
Since the demonetisation of old currency notes of Rs 500 and Rs 1000, there have been several flip-flops by the government and the RBI during the implementation of the drive. So far, 59 communications have been issued by the RBI-Finance Ministry combine.
On December 19, it was announced that all cash deposits exceeding Rs 5,000 would be scrutinised. A day later, the RBI withdrew the limit for KYC-compliant accounts, sparking a debate on the independence of the central bank.
Panagariya said the powers of the central bank cannot be compared to the powers of the US Federal Reserve.
“In the US, the Fed is completely independent. In the Indian system, still the central bank is not quite as independent as the Fed Reserve is. In fact, if you read the RBI Act, it even actually gives the government the power to give direction to the central bank,” said Panagariya.
On the burden of Non-Performing Assets (NPAs), Panagariya said the government has recognised the problem.
“…the options perhaps of cleaning up the assets through some sort of asset reconstruction company or some sort of bad bank and all is being discussed. Some of the momentum has been a little lost temporarily because of the demonetisation but I think there is recognition in the government that something absolutely needs to be done. I am very optimistic we will get there,” he said.