Both sides of the coin: What top economists think about demonetisation

The nation stands divided in its opinion on whether the drastic measure taken by the government was an informed step.

Written by Radhika Iyengar | New Delhi | Updated: November 28, 2016 7:03 pm
demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express In the wake of demonetisation, there have been multiple debates on whether the “radical” and “bold” step taken by the Central government was a judicious, well-thought out and well-implemented step. (PTI photo)

It’s been 20 days since Prime Minister Narendra Modi announced the implementation of the note ban. In the wake of demonetisation, there have been multiple debates on whether the “radical” and “bold” step taken by the Central government was a judicious, well-thought out and well-implemented step, and whether it would really eradicate all the existing black money – an argument that sits at the core of the move.

The nation, of course, stands divided in its opinion on whether the drastic measure taken by the government – which has plummeted the country (temporarily, the government argues) into a financial paralysis – was an informed step. We have complied a list of what some of the country’s leading economists and experts have to say. Unsurprisingly, the views are divided, but we ask the readers to make their own inferences.

Experts and Economists who are against Demonetisation:

Amartya Sen: Leading economist; Noble Laureate; recipient of the Bharat Ratna

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Nobel laureate Dr Amrtya Sen Express Photo by Tashi Tobgyal New Delhi 171215

Calls the move authoritarian: In an interview with The Indian Express, Professor Sen said, “Only an authoritarian government can calmly cause such misery to the people — with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back.”

Says that the government claims that unless proven otherwise, all are potential hoarders of black money: “Telling the public suddenly that the promissory notes you have, do not promise anything with certainty, is a more complex manifestation of authoritarianism, allegedly justified — or so the government claims — because some of these notes, held by some crooked people, involve black money. At one stroke the move declares all Indians — indeed all holders of Indian currency — as possibly crooks, unless they can establish they are not,” he told The Indian Express.

Move is a failure — the intended targets know how to avoid the trap: “It is hard to see how. This will be as much of a failure as the government’s earlier promise of bringing black money stacked away abroad back to India (and giving all Indians a sudden gift — what an empty promise!). The people who are best equipped to avoid the intended trap of demonetisation are precisely the ones who are seasoned dealers in black money — not the common people and small traders who are undergoing one more misery in addition to all the deprivations and indignities from which they suffer.”

Dr. Manmohan Singh: Former Prime Minister; eminent economist; former RBI governor

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Former prime minister Manmohan Singh during the demonetisation debate. (Source: ANI)

Overall opinion: Speaking at the Rajya Sabha, Dr. Singh has called demonetisation an “organised loot” , a “legalised plunder” and a “monumental mismanagement”. He even said that the National income would fall by 2 per cent, which in his mind was “an underestimate”.

Asked why people weren’t allowed to withdraw their own money: “I would like to know from the Prime Minister the names of any countries he may think where people have deposited their money in banks but are not allowed to withdraw their money. This alone, I think, is enough to condemn what has been done in the name of greater good of the people of the country.”

Those who’d bear the biggest brunt will be those in the agriculture sector and other informal sectors: “In my opinion, the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sectors of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 percentage points as a result of what has been done….After all, 90 per cent of our people work in the informal sector, 55 per cent of our workers in agriculture are reeling in distress. The cooperative banking system, which serves large number of people in the rural areas, is non-functional and has been prevented from handling cash… all these measures convince me that the way this scheme has been implemented is a monumental management failure.”

Kaushik Basu: Leading economist; Senior Vice-President and Chief Economist at The World Bank

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express The World Bank chief economist Kaushik Basu (REUTERS)

Cannot wipe out black money; hoarders have already found loopholes: “Anyone seeking to convert more than Rs 250,000 must explain why they hold so much cash, or failing that, must pay a penalty,” Basu wrote in The New York Times. This requirement, he wrote, has already spawned a “new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers”.

The move is severely hurting its unintended targets: Basu said the move is hurting people who aren’t its intended targets as many individuals who have no illegal money could have build up cash reserves over time. “Relatively poor women stash away cash beyond their husbands’ reach, as savings for the children or the household,” he added in The New York Times.

Arun Shourie: Former economist at the World Bank; recipient of the Padma Bhushan and Union Minister

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Arun Shourie

If the government was planning this for months, how could it be possibly so ill-prepared? In an interview with NDTV, Shourie asked by the government could not anticipate any problems when they finish off 85 percent of the currency value in India. “Small and medium enterprises, transport sector, the entire agricultural sector—I can’t reach them. I can’t reach 6 lakh villages. They did not think about this?”

Will demonetisation weed out black money?  Not really, because the owners of black money have intelligently converted all that money into tangible and intangible assets: “This is not a strike on black money, and the reason for that is that those who hold this black money or who have black assets, they don’t hold them in cash. One percent of Indians own 53 percent of the total assets in India. 10 percent own 85 percent. Now these are the rich fellows, who would be having an even larger proportion of black money. They are not going to put money under the mattress! They are holding it abroad—and there also it’s not dollars in gunny bags, it’s property! Maybe jewellery, maybe other assets, maybe stock markets.”

On “Cashless economy”: While Modi has continuously advertised e-transactions and said that demonetisation will pave a way towards India becoming digitally modern, Shourie said that those most affected were farmers, whose usual transactions are small. “You think in the agricultural sector, daily wages would be paid through debit cards? Or that poor fellow [a farmer] will use a credit card to buy vegetables? He only earns for that day!”

Experts and Economists who are for Demonetisation:

Arun Jaitley: Current Finance Minister of India; Senior Advocate, Delhi High Court

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Eventually, the government will be able to invest more money in agriculture and social sector: “A lot of money that operates in the shadow economy will now become a part of the banking structure itself. Banks will have a lot more money to support the economy. Private sector investment, which was so far lacking, will now get back into the economy. The banks which were struggling because of the NPA problem will have a lot more money to lend for agriculture, infrastructure sector, social sector, trade and industry.”

Bibek Deb Roy: Leading economist; Member of the Niti Ayog, a policy think-tank for the GOI

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Bibek Debroy

In an interview with Karan Thapar, Deb Roy spoke about the note banning and its repercussions.

His take on the impact on daily wage laborers and loss of jobs: “What happened on November 8 is part of a broader jigsaw. There are several other measures that have happened. The Indian economy, in certain sectors, is going through a slowdown. If these figures are going to be taken seriously, you have to demonstrate to me…that these job loses are because of 8th of November alone and not because of other things,” he told Karan Thapar.

On why the notes are different sizes, which deter quick production and circulation of the notes: There have been several arguments pitched by economists as to why the different denomination notes vary in sizes. The difference in sizes are delaying the printing and therefore taking longer to circulate within the country. Mr. Deb Roy argued that the notes vary in sizes because the sizes inform those who are visually impaired about what denomination they are holding: “You must realize that there are ordinary, sensible people who also happen to be disabled. For them the way to distinguish between currency notes is often in terms of size…Therefore accept that the currency notes have to be different in size!”

Note: The argument that the size needs to be different for visually disabled doesn’t hold water. This is because the RBI has introduced two features in the notes which make it easier for the visually impaired to distinguish between the denominations. First, the RBI has introduced the new notes which can be read in Braille. It was a feature the Finance Minister, Arun Jaitley had mentioned in his budget speech in 2014: “The government will print currency notes with Braille-like signs to assist visually challenged people.” Two, the notes also have angular bleed lines, which are elevated markings that appear on the upper right and upper left frame of the notes. The number of bleed lines are unique to each denomination, and are therefore easy to distinguish between. Different sizes therefore, don’t really matter.

Arvind Virmani: Leading economist; Former India’s representative at IMF; Former Chief Economic Adviser, GOI

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Arvind Virmani

Useful method; secrecy was a per-requisite: “This is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations. The manner in which it was implemented is not surprising – such actions are always secret till announced, so that insiders do not take advantage of the information at the cost of the outsiders,” he told The Wire.

However, he agreed it would have a negative impact on the small businesses: “How it will affect requires a deeper study, but the first thing one knows is when you demonitise such a large proportion of currency, the immediate effect is a collapse of retail trade in goods and services,” Virmani told Business World adding that this effects how quickly you replace the transaction demand. He said the currency needed for everyday transactions have has to be replaced quickly. “The longer that is delayed, the more the negative effect.”

Surjit Bhalla: Chairman, Oxus Investments, a Delhi-based economic research/advisory firm; Former Professor at Delhi School of Economics; Previously worked at the World Bank

demonetisation, note ban, note ban opinion, demonetisation opinion, economists on demonetisation, amartya sen, manmohan singh, arun jaitley, ban on rupees 500 and 1000, India news, Indian express Surjit Bhalla

Calls it a “bold step” on PM’s part: Bhalla wrote in The Indian Express that, “There should be no question that this BJP policy is bold and courageous. The trading community has long been identified as the BJP’s core constituency and Prime Minister Narendra Modi has gone against this powerful support group. So let us give Modi a considerable amount of credit for taking a bold step for the country — genuinely in the name of the nation.”

It’s bigger than the GST: In the same piece he argued, “The fight against corruption and black money in India has just begun. If successful, this will go down as the biggest reform in India, bigger than the GST (though the two are related) and bigger than the industrial policy reform of 1991. But, and there is a but, while the policy is very effective in its attack on past black money, it is silent on the creation of money.”

Black money hoarders are suffering: “Most of the spending of this black money is for expenditures on gold, purchase of foreign exchange, and purchase of real estate. Transfer of money abroad into ‘anonymous’ accounts is now a difficult exercise for all the world’s black money residents. Gold purchases and hoarding are also becoming more difficult. So, the prime outlet for big-time black money use is real estate,” he continues.