Sunday, November 13, 2016

Arun Kumar - Controlling Black via Demonetization of High Denomination Currency / Kaushik Basu - Damage greater than its benefits

Some public reactions

With ATMs functioning only at 10% of capacity, the struggle for cash is real.
10 Reasons Why BJP's Demonetization Move Is An Unmitigated  & Politically Motivated Disaster
Note ban has led to 'financial chaos', say bank unions

A comment by Jairus Banaji: The fanfare about the banning of notes is pure eyewash and typically the hardship is being felt by millions of people whose income doesn’t even reach taxable levels. Cash is a minute fraction of the entrenched mountain of undeclared income/assets in India. If Modi was really serious about tackling the problem (he absolutely isn’t), he could have started by ordering an investigation into why Gautam Adani’s brother turns up in the Panama Papers and what the links are between the Adani Group and those money laundering circuits. He can’t do this because it is precisely such corporate groups that finance the BJP with substantial ‘black money’ donations... As for the saintly Amit Shah and his constant jibes at the opposition, what about the 2½ crores he allegedly extracted from Ketan Parekh in exchange for help in withdrawing the SLP filed in the Supreme Court by the Madhavpura Mercantile Coop Bank? It is well known that Ketan Parekh bankrupted the MMCB by using their funds for the stock market scam of 2001. The 2½ crores bribe was allegedly handed to Shah at a meeting in the first week of October 2004, according to a very precise report filed by the Gujarat CID (Crime), which Modi suppressed. Did Shah declare that money to the income tax authorities?... What’s he doing giving sermons on this topic now? To believe the government is serious about this crusade is as smart as believing Trump means it when he says he has ‘great respect’ for women.  News links on the above: 

Arun Kumar - Controlling Black via Demonetization of High Denomination Currency
The PM’s announcement that high denomination currency notes will soon be worthless paper caught everyone unawares. Even the government departments did not know of it and would have to prepare for its implementation after the TV announcement. It is an attack against the black economy no doubt but questions will be asked about how effective it would be and at what cost to the economy? There will be an immediate impact and also over time as many unforeseen consequences emerge. It is so complex that analysts in the government or outside will be discovering new aspects of it for some time.

Do we have any experience of such a move in the past from which we can learn? In 1978, the Rs 5,000 and Rs 10,000 currency notes were demonetized. Of the Rs 165 crores of such notes that had been issued, Rs 135 crores were returned with little impact on the black economy. Not only that, the black economy continued to grow after that. The move did not touch the lives of the average citizens. The economy was small and the income of the average citizen was tiny compared to now. People carried mostly Rs.10 notes and hardly any Rs 100 notes. So, trade was not affected. So, it did not touch the lives of the average person. There were no queues at the banks.

The high denomination notes now constitute around 80% of the Rs. 16 lakh crore currency in circulation. Most of this is with business and not individuals. Even if it is held mostly by the well off with black incomes, say, the top 3% of the population, it would not amount to more than Rs.3 lakh per person and if businesses hold most of it then the average amount may not be more than Rs 1 lakh per person. Only a part of this would be black money saved out of the black incomes which cannot be accounted for. These are averages but some may hold crores in black money. But, black savings in cash may not be more than a few lakh crores.

Of the current size of the black economy of about Rs.90 lakh crores this may be only a few per cent. But clever rich and businessmen will find ways to circumvent the new regulations and convert a part of their black into white. The black economy in India is not parallel but intertwined with the white economy. So, just as in 1978, a very tiny part of the black economy would be demolished. The real worry ought to be that the mechanisms of generation of black incomes in different sectors would be unaffected by this move and black income generation would continue as before.

At what cost to the economy? Household, business and industry would be adversely affected as transactions would become difficult in the coming months. Large part of the economy does not use plastic money or cheques. Small businesses will be hit hard and that is the BJP’s core constituency. There would be long queues at banks and a black market may emerge in the currency notes for exchange and for smaller currency notes. There would be premium for gold and foreign currency – this was the case in the 1980s with the Bearer Bonds. Jan Dhan accounts are likely to be used for converting black into white. Havala may become more active. Demand for discretionary items would drop sharply in the coming months. But sales in Malls and from e-commerce based on plastic money may rise. However, in the net, dislocation of trade and commerce is likely leading to a hit for industry which has hardly been growing recently.

Our poorly performing and leaky bureaucracy would be unable to handle such a complex operation at such a short notice. Remember the wheat trade nationalization in early 1970s which had to be reversed in a few months time because of the havoc it created. But the present move cannot now be reversed even if it fails. The government has taken a big risk. Why? Recent steps to control it via the foreign money bill and the Income Declaration Schemes failed. It wants to show that it is serious about the black economy after its promises during the 2014 election. In conclusion, it is unclear that the likely impact on the black economy would justify the costs that the economy would have to pay.
Arun Kumar Retd. Prof of Economics, JNU.- Author of `The Black Economy in India’
World Bank Chief Economist and India’s former chief economic advisor Kaushik Basu said that the Narendra Modi government’s demonetization drive was not ‘good economics’ and that the damage it causes will be greater than its benefits. “GST was good economics; the demonetization is not. Its economics is complex & the collateral damage is likely to far outstrip the benefits,” Basu tweeted on Friday evening. Basu was the CEA in the Finance Ministry from December 2009 to July 2012.

On day two of the demonetization drive, serpentine queues were reported from banks and ATMs around the country. While government utilities were said to be accepting old currency, banks were quickly running out of cash. Senior government officials said that such difficulties were expected and things would improve in the coming days, even as the centre extended the use of old notes in utilities by another 72 hours.

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