Top Citibank Economist Admits India Currency Change Was to Destroy Black Markets

The following exchange took place between Willem H Buiter, Global Chief Economist of Citi, during an interview with MoneyControl:

Q: Your student Urjit Patel is the governor of the Reserve Bank of India (RBI) I assume therefore you are following India closely what do you make of this massive currency change that India has undertaken? How will that impact growth?

A: Two things were confused by whoever initiated the currency exchange. One is going after the black market tax evasion, the underground economy by having the currency slop, the currency reform. The Netherlands, my own home country did it after World War II to catch black marketers. You do it immediately, unexpectedly, but you have to have all the new cash, the large denominations ready. That is one. Second, you want to basically get rid of cash and move to an e-money economy. There you give years’ notice and say two years from now, we go into eliminate the Rs 1,000 notes, three years the Rs 500, etc. And somehow, they got the two mixed up. So, they did it immediately and unexpectedly, but it did not have to the new cash ready. So, that was a bit of a mess, but in principle, this way of going after the black economy can be very effective. It just means you have to have the new cash ready rather than have people hope and wait for it and panic.