Few know the Indian financial system as well as KV Kamath does. The former ICICI Bank chairman sees enormous benefits from demonetisation , though he says short-term pain is inevitable. In an interview with MC Govardhana Rangan, Kamath, now president of the New Development Bank established by the BRICS states, says creation of black money would be a lot harder in future. Edited excerpts:This move was needed to address the issue of corruption in the country. To me, other issues in terms of counterfeit money is important, but secondary issue. Primarily to address corruption, this was needed. Having said that, we have to salute the common man and woman for the strength with which they have really faced in the last one month’s challenge. It also denotes a set of opportunities that are in front of us. Opportunities in the context of inflation that will take a dent. It will certainly take a dent for sucking out certain transactions, prone to cause inflation. Clearly, it will lead to interest rates dropping in the system.My own assessment sitting outside is that we should be looking at over 1% drop in interest rates within the next six months. I can’t see how banks cannot drop deposit rates. And I cannot see how in monetary policy context you cannot drop policy rates. Banks have to drop rates because of inflows. Authorities will have to drop rates because of inflation coming under control. This has several positives that will drive economy after a short hiccup. The main positive is the huge pickup in the retail consumption sector whether it is homes, cars or motorcycles, everything that happened when interest rates dropped in 2003-2004 when mortgages were 14% that came to 8%. Then the economy started taking off.Of course, if policy rates come down and government treasuries head on by a like level, that will be a Rs 150,000 crore of treasury profits for the banks. That is on top of Rs 100,000 crore profits that happened in the last quarter with treasuries moving down by around 70 basis points.I have not seen this in kind of a number in my career which should once and for all put an end to the question of where will the capital required to recapitalise banks come from. The answer: it comes from within due to this salutary impact. Of course, all this has to be done when a patient was undergoing surgery. In this case, you are sucking out 85% of the blood, putting the patient on a heart-lung machine and getting the patient back safely on course. Except that in our case we will not put all the blood back, because a part of that will be digital blood because a part of it will not come back as hard currency. Out of Rs 16 lakh crore being sucked out, how much would be put back. If we are pushing to a digital economy and if net out for the corrupt money in the system, you don’t need to get back the whole amount of life blood as it were.There was a talk that one-third or one-fourth won't come back. But that to me was before the tax scheme on unaccounted deposits was announced. There is a lot that has been deposited. From an outside view, a large amount got deposited after that. How much of that is going to be taxed? I guess, a large part may come back. It is better to get it taxed and have a quarter of it now, and a quarter on a time-adjusted basis rather than none of it. I would be surprised why would anyone not put back the entire thing and not pay tax on it. I don’t think it is a failure. If nothing is taxed, we would need to understand how it managed to escape tax. I am sure it would be taxed.Short-term pain will be there. There will be an impact on interest and inflation. Ultimately that is what drives the economy. I believe that we have got the patient in good condition after this exercise and the patient should be doing well for a long period of time. How will again another cycle of unaccounted wealth not being created? It has to be to get greater digital money, greater online, digital tracking using all the tools of big data — you have to try to prevent accumulation in unwanted places. It is not difficult to do that. Digital money gives you the ability to track that.Any honest tax payer would welcome better tax compliance and authorities will be assisted by technology. Even today, high-value transactions are tracked and it is the system that is throwing it out. I am sure you can now change the filter of where you want to track it. The difference is digital money can be tracked real time. You can real time assess what is the transaction size, which PAN card did it and what is the returns this PAN card has filed and say that this doesn’t look kosher. It doesn’t require human intervention. There are so many ways in which transactions can be tracked down to where it has been done. The tools are clearly there today with the government for a cleaner setup.On the digital front, a whole lot of actions should be done basically to build new technology infrastructure to prevent unwanted activities. The Prime Minister has also talked about the Benami Act. You need to make that effective and I am sure the government is clearly inclined to make it more effective.If volumes increase by fourfold and banks drop their fees by half, you still come out as a winner. Question is where is the tradeoff? Will a smaller margin but larger volumes make you neutral? I have not looked at the numbers, so I can’t comment on it but there are a whole lot of other ways in which incentives could be done. For example, 15 to 20 years ago, South Korea, to encourage credit card use, said that any transactions done through credit cards will have a deductibility in tax. It became a huge incentive to drive transactions online. There are a whole lot of things that can be done today so banks take some pain, the rest of the system takes some pain but it comes out a winner because scale improves.If the government is going to get the money back as tax, that would be the cleanest way to look at it. Let all the money come back into the system and government gets its tax on one-fourth that is actually accessed for tax. If it (black money) is one-third, the tax is 50% which is Rs 2.5 lakh crore. I would think that is the neatest and the quickest way to get money back. You can put any number to it and get the arithmetic.If the game is also to compress the amount of currency in circulation and move things digitally, I think the government ends up holding a lot of cards in its hands.It has been heralded. The whole climate globally is against things which were taken for granted over the last few years. If you see, governments are falling in several parts of the world on just this issue of corruption. And somebody fighting for ending corruption...will be saluted and heralded.I would have been a huge votary. I would only have said this: it takes enormous courage to do this. That courage our Prime Minister has got. And that is the difference. Enough people would have argued there are challenges. And it would only be somebody with the bias for action, and the courage to take action, who can actually drive this.