Demonitization

Recently a friend of mine messaged me on LinkedIn to write in a couple of sentences my opinion on the entire demonetization exercise. I am reproducing it here with minor modifications indicated in Italics.

“Demonetization is a bold political move by the BJP government. It had conveyed a strong anti-corruption stance of the government to the masses and BJP certainly did benefit in the recent elections post demonetization from it. That is where all the positives of this exercise end. There is no economic rationale for such a drastic step. It had a short term negative impact on consumer durable, FMCG and other industries and no know long term benefits. The liquidity squeeze can have irreversible negative effects on the informal sector which is heavily dependent on cash for transactions and employs the maximum number of Indians. The infringement of government into the autonomy of the RBI is also quite disappointing. RBI has not released the information regarding the amount of old currency it received back which itself tells us about the success of the exercise. Recent RBI data also shows there has been no improvement in the value of electronic transactions which the government in later stages stated as the objective of this exercise when curbing black money reason failed to convince people. The cashless economy could have been given a boost with policy initiatives like Jan Dhan Yojana etc without making the poor suffer.”

Recent GDP data shows a drastic slowdown in the economy in Q4 of 2016-17. Hopefully, the government has learnt something from this misadventure. Here are some interesting articles on demonetization which I have collected over the last several months.

Here are some interesting articles on demonetization which I have collected over the last several months. Finally, I have stopped procrastinating and am writing them down. Some of the arguments are awfully old and may not make much sense at this stage. However, I find them interesting in the context of demonetization so please bear with me.

  • This article talks about the benefits of nudging poor women people into opening bank accounts, an unintended effect of demonetization.

“women have difficulty in protecting their savings from demands placed by relatives and social contacts but, at the same time, face barriers ranging from unfamiliarity to distance in opening a bank account. Therefore, an act of nudging them to open a bank account could have dramatic real impact on future savings, investments and consumption.”

“The bottom line of all these research findings is easily summarized. There is enormous latent demand for formal financial services among the poor. However, frictions such as distance, fee, minimum balance requirement, lack of trust and social customs, among other issues, keep the poor away from formal savings instruments. However, once nudged into the formal financial system, the poor not only actively transact but also reap real benefits in terms of additional savings, investments and income.”

  • This article in NDTV from the early stages of demonetization which has several “pundits” predicting the amount that the government is going to save from old currency notes not reaching the banking system.
  • Another article from those early days which talks about the strategies people were using to convert black money to white.
  • This piece by Ajit Ranade, Chief economist of Aditya Birla group, in the early days of demonetization argues that currency swap/ demonetization would not result in windfall gain to the government. He bases the argument on following points

    “Notes are of varying vintage. Their write-down is over a long extended period. So the gains are gradual, and get recorded as special reserves. Secondly, the RBI has to keep issuing new currency to keep pace with at least the nominal gross domestic product growth rate. Thirdly, if the RBI tries to encash its gains by selling assets from its balance sheet, that might exacerbate the liquidity crisis.”

    Most probably since the government has not received any gains we need bother about if and how the government can write down its obligations.

  • In another article from the early dasy of demonetization, Mr Subbarao, Ex-governor of RBI, says that even if there is a windfall to the government they should not use it to reduce fiscal deficit as the entire exercise may be misjudged as an action not against black money.
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Author: Bobbur Abhilash

I am a fourth year Doctoral student in the Finance and Control Department at IIM Calcutta.

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