said he was puzzled by demonetisation and that it was a blunt instrument to tackle the problem of black money and corruption. He said that Prime Minister Narendra Modi’s performance is a bit below expectations and called on the government and RBI to spur economic growth by cutting rates and increasing fiscal spending. Edited excerpts from an interview with MC Govardhana Rangan and Joel Rebello:It was puzzling. I would not have done this… It was an attempt to flush out corruption with a very blunt instrument. There is a lot of collateral damage. But we can say that the damage to the economy is not as bad as some of us feared. When it happened, my first reaction was, if I had to guess, the economy would shrink in proportion to the reduction in the monetary base. That did not happen, which is a good thing. It was shock therapy that was not well advised. It is not going to make any lasting dent in corruption and it could do a significant amount of damage to the economy.It has been less dramatic than people had imagined. I think that GST is the right kind of thing, emphasis on public investment is a good thing but it does seem to be a little less than promised. I listened to Modi speak in Delhi when I was there. What he reminded me of was oddly of Shinzo Abe in Japan, of whom I am an admirer. It is funny because in Abe’s case he is someone who is a nationalist whose views I consider appalling, but has done quite a lot for the Japanese economy and also rather oddly given his social conservatism has done a lot for women in Japan. I felt that there is some of that here, the odd mix of assertiveness and slight authoritarian tinge, but then reasonably effective but in some ways oddly socially progressive policies.The evidence of a global plateau in trade is very clear now. Hyperglobalisation looks like a one-time event between 1990 and 2010. In terms of the underlying economics, there is no inherent reason why trade has to grow or grow faster than GDP . It can shrink because it is about relative rates of technological progress in transportation and communication versus domestic production. So far, the slowdown in world trade does not seem to be about protectionism. We had a major move towards free trade back in the early 90s on the part of emerging markets and advanced countries before that. We are not seeing any reversal of that movement. So far, it is only about the technology. There is nothing inherently bad about it though it raises some questions about the development model. The chances of an actual protectionist revival have obviously gone up. The institutions that have sustained global trade have less political support than people thought. We definitely have the possibility that the guy in the White House will lash out.Germany is to be blamed for quite a lot in terms of European economic policy, but the bilateral surplus with the US is a very bad place to challenge them. It is possible to see a series of escalating actions (and) retaliation based on the falling apart of the WTO structure. That would be the scenario that one would worry about in which the US would end up imposing major tariffs and other people would do the same thing. It would probably not cause a great depression. That’s a misunderstanding. It might cause some short term economic slowdown, but that’s much less clear. But it would cause a lot of disruption.If we had a trade war we would take an existing structure and disrupt it and restructure the things that we already got. Communities were hard hit by the moving of jobs by the US to Mexico or to China in the past. Now we have communities that earn their livelihood exporting to Mexico or are part of the global value chain that includes China, which will be disrupted. So you would create a whole new wave of displacement of workers. The effect on overall GDP might not be that large but the effect on job churn, the number of communities disrupted would be quite, and the impact on emerging nations would be serious. India would be exposed, but I really think places like Bangladesh and Sri Lanka would be terribly exposed.Firstly, it is unclear exactly how this is going to work: whether China is really going to finance all of this infrastructure in other countries, or is it going to try to put its name on things that would have happened anyway. It is true that water transportation is still cheaper than over land. It is possible. I would like to see them do it. It has been a while that we have seen a major improvement of the global infrastructure for the physical goods. You can tell a story of how China ends up becoming the economic centre of gravity of the world in part because of abdication, for different reasons, of the US and Europeans.It makes far more sense for India than for the US for sure. It is surprising in so many ways that India does not export more manufacturing goods. You can make an argument that there are some policy issues that have restricted manufacturing growth in India. Manufacturing could be a bigger deal in India. If you are talking about the rest of the world then it is quite foolish to imagine that manufacturing can be a big source of job growth. It wouldn’t restore the previous glory of manufacturing as an employer. You say robotics, but even general productivity growth has meant that we can satisfy the demand for manufacturing even with a small labour force. The same happened to farming. People who imagine that prosperity means more manufacturing, it’s the same way 100 years ago when people said the true economy is that of the farmers and that is not going to happen.The long-term history of banking has seen many crises. There is a little bit of confidence trick in the activity of banking because banks are inherently leveraged institutions which create liquidity and so there is always the chance of bad decisions, or panic creating a crisis. After the great depression we established a system of heavy regulation which meant that crisis became rarer. Then the deregulation in the 80s in some ways made a return to the old regime of frequent crises and we had a moral hazard because people expect to be bailed out, so we have much lower capital ratios than what was in the pre-regulation era. So regular bailouts become a recurrent feature of the system. A year ago if you had asked me I would have said we are gradually re-establishing a sort of 21st century equivalent of the 1950s system when we were gradually tightening regulations. What we are seeing in Europe is not a new risk. We are not seeing bailouts in Italy because Italian banks have acted responsibly in the last five years, we are seeing legacy risks. We have a Congress in the US that seems to be determined to recreate the conditions for a 2008 crisis, they may mange to do that. We forgot the lessons of the great depression and then failed to learn from the repeat of the crisis.In Europe most of the problems are known unless there is something on the horizon. The euro area crisis was probably a one-time event. We had this tremendous capital flow into southern Europe after the creation of the euro and then the crash and a lot of NPAs coming out of that. That particular crisis is not going to happen a second time. Something else might happen. I don’t see this as an endemic banking crisis in Europe. I think Europe has a political crisis rather than a banking crisis.With a little luck we will have fewer bouts of euphoria followed by panic in emerging markets. Maybe I am being excessively hopeful because the finance industry always does seem to find ways to become excessively enthusiastic and then suddenly change its mind. We are not in a situation now where we have very heated capital flows to the developing world which will suddenly collapse as policy tightens in advance countries. I think the flows look much more stable and there is a lot less hot money involved in the story now, and also a lot of graduation. Twenty years ago emerging markets were extremely vulnerable because they had underdeveloped financial sectors and had borrowed too much in dollars and euros and they were exposed. That is much less the case now. A few years back we had the taper tantrum and many emerging market currencies like the Brazilian real tumbled, but the real economic fallout was not really as bad as the Asian crisis. I think we are more robust now. I am also not clear how fast the financial normalisation is going to go. I suspect the Fed is now nervously looking at inflation numbers and saying do we really want to keep raising rates.Nothing. I don’t think they should have raised rates at all. I think they should definitely wait and see actual evidence of inflation before doing anything more.There are multiple plausible stories. There is the Chinese crisis that we keep on thinking is going to happen, but never seems to happen. But one of these days, may be, it does. There is the Constitutional crisis in the US that might be interesting. It is looking like the European system is a bit stronger after France. But now we look at Italy which looks wobbly, and if they exit that would be disastrous for the European system. The US has got a crazy person in the White House, the European system is badly flawed in many respects, and China has not managed the transition to a more consumer-based economy. So which of these things are going to happen? At some point, some will. God knows.