Note ban can't alone curb black money accumulation: Rangarajan

Demonetisation cannot be a "standalone measure" to check black money as others like tax and electoral reforms are needed to tackle this menace, former RBI Governor C Rangarajan said.

He maintained that the authorities should have been well prepared for the note ban exercise.

"The demonetisation measure has no doubt sent shivers down the spine of some. However, because of the shortage of new currency to replace the old many have suffered."

"All this will have an immediate effect on the economy which will be adverse. The long term gains are in terms of reduction in the proportion of pure cash transactions, and a shift to digital mode of payment leading to recording of all transactions and thereby helping to widen tax net," Rangarajan said.

He was delivering inaugural address at 32nd Conference of All India Reserve Bank Employees Association on Friday.

"In short, much of the controversy over demonetisation could have been avoided, had the authorities been better prepared," he further said.

The former RBI governor felt that the note ban cannot be a standalone measure to prevent further accumulation of black money as it depends on future policies of the government such as improved transparency in governance, revised tax structures and administration and also electoral reforms including funding for political parties. 

On the issue of autonomy of RBI, Rangarajan said in parliamentary democracies, the issue of autonomy becomes complicated.

"To sum up, autonomous institutions with specific mandates are an integral part of democracy. RBI is one such institution in India. Its ability to perform its functions must not be compromised. Eternal vigilance is the part of its autonomy," he said.

He opined that the policy makers need to be conscious of the fact that the growth has slowed down and hence they should focus on getting new investments which will spur the growth resulting in job creation.

He said the banking system in India is currently passing through rough weather and over the last few years, there has been a "sharp decline" in the quality of bank assets.

"The slowdown in growth itself causes distress. The original optimistic projections turn sour. As the saying goes bad loans are sown in good times.

"A hard look at the nature and cause of non-performing loans is required to draw appropriate lessons for the banking system and non-performing loans need to be classified into those affected by external factors and those by internal factors," he said.

Citing the Financial Stability Report of December 2016, Rangarajan said the Gross Non-Performing Advances ratio of Scheduled Commercial Banks increased to 9.1 per cent in September 2016 from 7.8 per cent in March 2016.