Top Economists Around the World Assess India’s Currency Curbs

After demonetisation, it is being debated whether India’s positive standing in world economy will be threatened.

4 min read
Prime Minister Modi’s 8 November announcement banned Rs 500 and Rs 1,000 notes as legal tender. (Photo: Reuters)

It has been more than three weeks since the government announced its decision to demonetise old Rs 500 and Rs 1,000 currency notes. There has been a wide-ranging debate on whether the government’s move will indeed succeed in curbing black money hoarding and tax evasion.

Analysts have argued on the short-term and long-term impact of the move. Citizens have stood in queues for hours outside bank branches and Automated Teller Machines (ATMs). Some have praised and supported the move while others have called it a grave inconvenience, especially for India’s middle classes.

India has been on many occasions called the ‘bright spot’ of world economy by organisations like the International Monetary Fund and the World Bank. A key question that has emerged from these debates is whether the demonetisation drive will threaten that outlook. While the exact implications are hard to pin down at the moment, it is important to take note of what economists around the world are saying about this sudden, “radical” move.

Poorly Designed And Likely To Fail: Kaushik Basu

While the government's intention in tackling the black money problem is commendable, demonetisation will only make a minor dent in corruption. It is however, likely to rock the entire economy, according to Kaushik Basu, the former chief economic adviser of India and the former chief economist of the World Bank.

(Photo: BloombergQuint)
(Photo: BloombergQuint)

In an opinion piece in the New York Times, Basu argued that the overall benefits will be "small and fleeting" as the bulk of black money in India is not held in actual cash, but in the form of assets such as gold, silver, real estate, and overseas bank accounts.

"...Even if demonetisation can flush out the black money that is held in cash, with no improvement in catching and punishing tax evaders, people with ill-gotten gains will simply start saving in the new bills currently being issued," he said.

No Lasting Effect In Curbing Black Money: Larry Summers

“Petty fortunes and not the hugest and problematic ones are being targeted” by the government through its currency curb, according to former US Treasury Secretary Larry Summers.

(Photo: BloombergQuint)
(Photo: BloombergQuint)

In a blog post co-written with Natasha Sarin, Summers expressed doubts that demonetisation will have any lasting effect in curbing black money or corruption.

Their argument springs from questions of both “equity and efficacy”. The definition of illegal or corrupt in India is open to debate because of the commercial practices that have prevailed in the country for a long time, they said. “Corruption will continue albeit with slightly different arrangements,” the authors concluded.

Authoritarianism At Its Best: Amartya Sen

Noble laureate and Bharat Ratna recipient Amartya Sen expects the demonetisation drive to be as much of a failure as the government’s earlier promise to bring back black money stacked in foreign countries.

In an emailed interview with The Indian Express, Sen disapproved of the government's move to withdraw old Rs 500 and Rs 1,000 bank notes from circulation overnight, calling it a complex manifestation of authoritarianism.

(Photo: BloombergQuint)
(Photo: BloombergQuint)

He argued that the seasoned dealers in black money are well equipped to avoid the intended trap and that it will only add to the misery of common people and small traders.

Bold And Audacious Move For A Country With Endemic Corruption: Kenneth Rogoff

The idea of taking out big currency notes from the financial system, while not new, is extremely radical during peace time, according to the former chief economist of the International Monetary Fund, Kenneth Rogoff.

(Photo: BloombergQuint)
(Photo: BloombergQuint)

In an article on the Princeton University blog, Rogoff said India's demonetisation move draws close comparisons with the ideas he discusses in his book, The Curse of Cash.

He, however, suggested a more gradual phase-out of currency notes, one that would ideally last for seven years with exchange being made increasingly less convenient.

He said that such a method would be far less disruptive to the economy, and would leave enough room for authorities to deal with unanticipated consequences.

Permanent Withdrawal Of Large Notes Could've Been Better: Gita Gopinath

India's current policy of replacing Rs 1,000 notes with Rs 2,000 notes undermines the long-term effectiveness of demonetisation, according to Harvard professor and economist Gita Gopinath.

In her blog on Project Syndicate, Gopinath, like Rogoff, argued in favour of a gradual implementation and said that a permanent withdrawal of large notes would've served Prime Mininster Narendra Modi's cause better.

(Photo: BloombergQuint)
(Photo: BloombergQuint)

The government’s current strategy will not punish black money hoarders, who are bound to find creative ways for recycling cash, she said.

She expects the near-term impact to be equivalent to an anti-stimulus policy with a “significant drag on demand”. She also said that the negative wealth effect will overwhelm gains, especially in the real estate sector.

(This article was first published in BloombergQuint)

(The Quint is available on Telegram. For handpicked stories every day, subscribe to us on Telegram)

Stay Updated

Subscribe To Our Daily Newsletter And Get News Delivered Straight To Your Inbox.

Join over 120,000 subscribers!