DeMon demon: The most ill-considered economic move by the Modi government has been demonetisation–Times of India

Following the release this Wednesday of Reserve Bank of India’s annual report of 2017-18, it is clear the government is clutching at straws by claiming that the objectives of the November 2016 demonetisation exercise have been realised. Almost 99.3% of demonetised currency was returned by its holders, belying claims of windfall gains for the taxman. From an economic standpoint, it is the most ill-advised move of the Narendra Modi government. An economy gaining in momentum recorded a slowdown for two consecutive years, at a time when about 120 countries witnessed a pickup in growth rates. This represents an enormous loss to the economy.

For the central bank, the move complicated monetary management. For farmers and the informal sector, traditionally the most cash dependent, it piled on long drawn out misery. The stated aims of demonetisation were to combat black money and “rising incidence of fake currency notes.” Five weeks after demonetisation began, finance minister Arun Jaitley told Lok Sabha that government had no estimate of black money in the economy either before or after demonetisation. In the absence of a reference point, demonetisation’s impact on black money is purely in the realm of faith. Given that most currency was returned, it may have helped launder black money overall.

For sure, an overnight ban on high value currency notes would have rendered fake notes harmless. But fake currency is a menace which requires constant vigil. As RBI’s annual report shows, new currency notes are also being forged. A collateral benefit was expected to be lower incidence of cash in the economy and a growth in digital transactions. One measure shows currency to GDP ratio was 10.9% in 2017-18, lower than the pre-demonetisation level. But even this level of currency usage is among the highest in the context of India’s emerging market peers. Moreover, there has been a surge in use of currency as a medium of financial saving. Cash hoarding by households is a fallout of demonetisation. Digital payments, after an initial surge in the absence of adequate currency notes, went back to trend level.

The key takeaway is that there is no substitute for relentless reforms which transform the economy by improving incentives. Grand gestures, high only on symbolism, hurt the economy while causing needless suffering. Black money can be curbed by adopting more transparent systems, as well as a taxation policy that lowers rates while avoiding special exemptions.

via DeMon demon: The most ill-considered economic move by the Modi government has been demonetisation

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