Demonetisation

                                                                     

Demonetisation—The Economists Speak ; Edited by Uma Kapila ; Published by Academic Foundation ; Pages 150 ; Price Rs. 595/-

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The Indian Prime Minister made an announcement on November 8, 2016 demonetising Rs.500/- and Rs 1000/- notes. This entailed removing of 86.4 per cent of the currency in circulation. The reasons offered for this draconian measure were to combat 1. Black money , 2. Financing terrorism and 3. Counterfeit currency. An after thought reason was to enable a transformation into a " less cash / cashless economy ".

Dr.Uma Kapila who has distinguished herself as a Reader in Economics from the Delhi University and is author of several valuable books on Indian economics has assembled a galaxy of scholars, each an authority in his / her field.

The book has 20  articles written by eighteen economists, scholars and policy makers--each offering his / her impressions on this imbroglio thrust upon an unprepared nation.

To begin with Prof .Y.K.Alagh provides a historical account of Demonetisation and its repercussions during 2017. He quotes with approval Dr. I.G.Patel, the then RBI Governor warning Prime Minister Morarji Desai—“This demonetisation of the Thousand Rupee Note will not work; Black money is held in land, gold and dollars. They appreciate in value and not in currency.” Eighty per cent of our economy works with cash ; financial intermediation is for the remaining 20 per cent. Patel called for speedy restoration of faith in currency, The economy will have to tackle problems like expanding demand, utilising surplus capacity and checking rising costs in some sectors.

Bibek Debroy reviews legislative measures and studies demonetisation comparing Indian experience with that of other countries. According to him, ”Demonetisation is only one of the various steps, not the only one to resolve “ black problems “ under the sun. The stock of black money can be in the form of gold,real estate and other properties.

Dr.Manmohan  Singh, while supporting the sentiment behind the decision is skeptical of its implementation. The introduction of the Rs.2000/- note has made it easier to generate unaccounted wealth. The macroeconomic impact of the move is likely to be hazardous.He is convinced that demonetisation measure has the makings of  mammoth tragedy.

Suyash Ray asserts that a cost-benefit analysis suggests that benefits  from demonetisation were relatively small compared with the costs. He analyses several parameters—Fake currency, black money,the poor, rights of the individual citizens, rule of law, society and institutions and asserts that the measure will make only a small dent on  the black money problem and it is not a good bargain considering the long-term consequences.

Radhika Pandey and Rajeshwari Sengupta study at length the impact of demonetisation on growth. They state that in emerging countries an important driver of GDP growth is investment. The demonetisation measure will act as a massive negative shock for consumption demand resulting in affecting investment. This could lead to a fall GDP  growth rate.

Sekhar analyses the impact of demonetisation on agriculture. According to him, it is unlikely to affect agricultural growth  since most of the agricultural transactions are carried out using cash, demonetisation is  bound to affect agriculture relatively more in the short to medium term. it is likely to hit farmers badly unless the public procurement of pulses improves and distress sales of perishables are addressed.

Ila Patnaik highlights how demonetisation and its handling has undermined the public confidence in the Reserve Bank’s capabilities and its commitment to to the inflation target.

Parthasarathy Shome opines –“ Policy makers would realise that not just tax evaders, smugglers or terrorists use cash but also the poor. The leaders of democracy have not been observed to queue at banks like the urban commoner. Thus it is ironic for political representatives proclaim that the entire country is with them.Whatever occurs ahead, a monitoring cell should be established to minimise adversity, reflecting its gravity, for honest taxpayers and the vulnerable.”

TCA Srinivasa Raghavan and S.L.Rao assess black money and how to eliminate its impact by rigorous investigation and honest  prosecution.

The Editor Dr.Kapila sums up that a country like India where corruption is all pervasive, fighting black money and its continuous generation is a major task for any government. Widespread corruption harasses the common man and acts as a deterrent to development. The way it has been implemented black money and corruption will not be eliminated so speedily. 

Quite recently an I M F Official Paul Cashin who is Assistant Director of the IMF's Asia and Pacific Department declared -- “It ( Demonetisation) is sucking in  with a vacuum cleaner cash from the economy. Cash is being replaced at a fairly modest pace. That led to lot of cash shortage that have adversely affected consumption”. He warned the authorities against build-up of NPAs and elevated corporate, sector vulnerabilities.

One wishes that the Editor had included articles from the Establishment with contributions from Arvind Panagariya, Arvind Subramanian, Urjit Patel—so that both sides would have been properly given an opportunity to present their case.

This volume is a highly valuable source book on the hottest topic of the day-Demonetisation.

P.P.Ramachandran.

05—03--2017