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Raghuram Rajan on Demonetisation Insights

Demonetization has been proposed in the past as a way to remove black money from circulation by forcing people to explain the source of large cash holdings. However, clever people usually find ways around it, such as dividing large sums into smaller amounts or depositing money in temple collections. It is not easy to completely flush out black money through demonetization alone. Instead, the focus should be on reducing the incentives for generating and retaining black money, such as improving tax administration and tracking undeclared income through data. India's tax rates are also reasonable compared to other countries.

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Pratham Shah
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11 views2 pages

Raghuram Rajan on Demonetisation Insights

Demonetization has been proposed in the past as a way to remove black money from circulation by forcing people to explain the source of large cash holdings. However, clever people usually find ways around it, such as dividing large sums into smaller amounts or depositing money in temple collections. It is not easy to completely flush out black money through demonetization alone. Instead, the focus should be on reducing the incentives for generating and retaining black money, such as improving tax administration and tracking undeclared income through data. India's tax rates are also reasonable compared to other countries.

Uploaded by

Pratham Shah
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Here is one of the speeches of dr.

raghuram rajan on demonitisation : 

​I am not quite sure if what you meant is demonetise the old notes and 
introduce new notes instead. In the past demonetisation has been thought off 
as a way of getting black money out of circulation. Because people then have to 
come and say "how do I have this ten crores in cash sitting in my safe" and they 
have to explain where they got the money from. It is often cited as a solution. 
Unfortunately, my sense is the clever find ways around it. 

They find ways to divide up their hoard in to many smaller pieces. You do find 
that people who haven't thought of a way to convert black to white, throw it into 
the Hundi in some temples. I think there are ways around demonetization. It is 
not that easy to flush out the black money. Of course, a fair amount may be in 
the form of gold, therefore even harder to catch. I would focus more on the 
incentives to generate and retain black money. A lot of the incentives are on 
taxes. 

My sense is the current tax rate in this country is for the most part reasonable. 
We have a reasonable tax regime, for example, the maximum tax rate on 
high-incomes is 33%, in the US it is already 39% plus State taxes, etc., it takes it 
to near 50. We are actually lower than many industrial countries. Given that, 
there is no reason why everybody who should pay taxes is not paying taxes. I 
would focus more on tracking data and better tax administration to get at 
where money is not being declared. I think it is very hard in this modern 
economy to hide your money that easily 

Hope that it will help!

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