Harvard's Rogoff and Reinhart on India's 'black money' cleanup: This time is different

Harvard economists Carmen Reinhart and Kenneth Rogoff have given a positive assessment of India's attempts to clean up its "black market" for money, but have concluded that the scale of its plans bears no relation to anything that has gone before.

"This time is different, this time is really different," Reinhart told a panel at the World Economic Forum in Davos, quoting the title of the book she authored in 2009 with her Harvard colleague.

"In terms of the scale and impact on potential economic activity," she added, suggesting that it would be "short term pain, long term gain" for the developing nation.

Hampered by so-called black money that is undeclared, the government announced last year that 500 and 1,000 rupee banknotes would be withdrawn from circulation. The short time span for the ban left the country in chaos with long lines forming outside banks and ATMs. Around 86 percent of the value of the cash in circulation in India was targeted.

Reinhart said she was surprised by the move, but called it largely positive. Looking at historical evidence, she mentioned currency moves in Singapore and Canada. But she explained that the closest to India's move, was actually the changes made to U.S. military certificates. She said that soldiers after the Vietnam War and World War II would use these pieces of paper in bars and led to an active black market.

However, Reinhart was left underwhelmed by how the Indian government brought in the new rules last November, something her colleague Kenneth Rogoff agreed with.

"Certainly the idea behind it was good. ... I would say some of the tactics, if I had been asked, I would have done it differently," he said at the same panel. He added that it takes six to 12 months for new money to be printed — even in developed economies — and revealed that this was the biggest problem that India had.

"It will take years to see what the long-term effects will be," he posited.

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