Prime Minister Narendra Modi announced on 8 November that banknotes of high value were being withdrawn from circulation. There has since then been a gush of commentary across the world on whether the currency reform would actually curb the black economy, the extent to which the immediate cash shortage would hurt economic growth, the political calculations behind this gamble and whether there was a fiscal windfall awaiting the government because of the destruction of some part of the currency stock.
Here is a curated list of what Mint editors, columnists and contributors have written on this controversial move.
Narendra Modi’s great leap forward (Manas Chakravarty)
As the disruption caused by the demonetisation effect continues unabated, government spokespersons have been pointing out that such a massive exercise is bound to cause some disruption. They are absolutely right. For what Prime Minister Narendra Modi is trying to do, through the demonetisation exercise, through the Benami Property law and by pushing through the Goods and Services Tax (GST), is nothing short of a revolution. And, as Mao said long ago, “A revolution is not a dinner party, or writing an essay, or painting a picture, or doing embroidery; it cannot be so refined, so leisurely and gentle, so temperate, kind, courteous, restrained and magnanimous.” What he meant was you can’t make an omelette without breaking eggs. Read more.
Fixing the plumbing—of our political economy (Vivek Dehejia)
The Indian commentary scene, whatever else may be right or wrong with it, is replete with unselfconscious irony. For two and a half years, a chorus of well-known observers in the domestic and foreign media has cried hoarse that Prime Minister Narendra Modi and the Bharatiya Janata Party- (BJP-) led government have failed to seize the nettle of politically difficult economic reforms. They have been timid gradualists, tinkering incrementalists at best, and not bold, visionary reformers, of the likes of Margaret Thatcher or Ronald Reagan: so went the refrain. Read more.
Partial demonetisation and behavioural change (Anil Padmanabhan)
It is three weeks since the Union government undertook the dramatic step to partially demonetise currency notes of the valuation of Rs500 and Rs1,000. In this period we have been witness to some of the most acerbic public debates—in social media, Parliament, drawing rooms and even public spaces. In the ensuing binary discourse, historians and commentators have pontificated as economists and some of the latter (like former Prime Minister Manmohan Singh) have morphed into polemicists to make their arguments. In the process, a key collateral gain is being overlooked: behaviour change. Read more.
Currency reform: a risky natural experiment (Niranjan Rajadhyaksha)
The popular quip being circulated in social media is on the money: India has seen an exponential increase in the number of economists ever since Prime Minister Narendra Modi announced his decision to withdraw banknotes of high value. There has been a gush of commentary on the impact this will have on the economy. Some of the best economists have jumped into the fray. Meanwhile, the hardship borne by ordinary citizens is undeniable. Read more.
Open letter to Urjit Patel (Rajeev Malik)
It is an understatement to write that the last month has been busy for Indians, overseas investors in India and economic commentators. The globally unprecedented scale of the experiment to transfuse 86% of the bank notes that will no longer be legal is being keenly watched. There is immense interest in its uncertain but negative impact on economic growth in the near term, and its potentially favourable—but still uncertain—impact in the long-term. Read more.
Demonetisation: How to account for extinguished notes (C. Rangarajan and Usha Thorat)
An interesting side issue in the controversy over demonetisation is how this will have an impact on the Reserve Bank of India (RBI) and the fisc. To the extent of extinguishment of currency, will it constitute a profit for RBI and will the government have access to it? The RBI Act 1934 itself does not specify how this should be treated. It is left to best accounting principles. Read more.
Demonetisation without replacement (Indira Rajaraman)
Of the two denominations demonetised on 8 November at midnight, Rs500 was the preferred storage denomination among labourers and itinerant people, and the modal transactional denomination in wholesale markets and mandis. The replacement trickle is said to have started supplying the new Rs500 note (although I have yet to see it), well after the Rs2,000 denomination made its appearance. Without enough Rs500 notes in circulation, the Rs2,000 note is rejected everywhere. It has simply not taken root as accepted tender. Read more.
What does the currency ban mean for banks? (Rajeswari Sengupta and Anjali Sharma)
The withdrawal of Rs500 and Rs1,000 notes on 8 November has changed the composition of money supply in the economy. A large part of what was currency in circulation is now coming to banks as deposits. The sudden inflow of deposits has given rise to speculation about how these will be utilized by the banks. There are reports that banks will increase lending. Some have suggested that banks’ non-performing asset (NPA) problems will get alleviated. This is not correct. Our analysis suggests that: (1) banks are not in a position to significantly increase lending, (2) their net interest income (NII) may fall over the next few quarters, worsening their capital position, and (3) their NPA situation may get worse, further adding to their capital woes. Read more.
Making India a cashless economy (Mint Edit)
Even as ordinary citizens queue up for cash and economists are busy estimating the extent to which economic growth will be hit because of the ongoing drive to replace high-value banknotes, there has been a lot of discussion on whether the government can use the current situation to push India towards a cashless future. In his radio address on Sunday, Prime Minister Narendra Modi once again pitched for creating a cashless society. Read more.
Demonetisation: The good, the bad and the ugly (Montek S. Ahluwalia)
Eliminating 86% of the value of the currency with the public was bound to be a shock. The government has called this “short-term pain for long-term gain” and many citizens on TV have said they are willing to endure short-term pain. But what gain and by when?
The long-term objective must be to cleanse the system of corruption, tax evasion and the generation of black income. demonetisation only targets that part of existing black wealth which is held in cash. It does not affect the continuous flow of black income and the corruption/tax evasion which generates it, which in many ways is the core of the corruption problem. Read more.
Narendra Modi’s war on illegal wealth (Mint Edit)
“Many commentators have pointed out that the attack on cash transactions is a strategic blunder by the Bharatiya Janata Party, whose core base from the Jan Sangh days has been the trader community. This view discounts the possibility that the rapid transformation of the Indian economy has changed the political dynamics. Is the ruling party now reflecting the interests of the national middle class and the rising neo-middle class that is harried by widespread corruption?” Read more.
“Scaling back large bills will not end crime, but it will force the underground economy to employ riskier and less liquid payment methods. There is reason, therefore, to believe that this move will reduce corruption and several forms of criminal transactions in the economy.” Read more
Demonetization is a hollow move (Pranob Sen)
“Eventually, the bulk of the cash finds its way into the informal sector, where it provides a part of the essential liquidity for virtually all transactions within the informal sector and between the informal and formal sectors. Considering the fact that the informal sector in India accounts for about 45% of gross domestic product (GDP) and nearly 80% of employment, disruption of this liquidity can be very costly indeed, both in terms of growth and equity.” Read more
Six battlefronts for the war on corruption (Vijay Kelkar and Ajay Shah)
“Targeting unaccounted cash on one particular day is only a small part of the story. There is a game of musical chairs being played. One day, the music stopped playing and the persons who were holding the cash were penalized by 25-50%. Can we set our sights higher and disrupt the entire game?” Read more
Demonetisation: The money trouble (R. Sukumar)
“Sometimes a shock to the system effects behaviour change far better than any other means. Sure, this may not work every time and not everyone may be able to pull it off but Modi is evidently gambling that he can.” Read more
No bonanza for the government from cash destruction (Anush Kapadia)
“Treating “currency” and “a checking account at the RBI” as qualitatively the same thing is a conceptual error. The cancellation of the former and replacement by the latter is not an exchange of like-for-like. The apparent bonanza from the cancellation of some portion of demonetized notes appears to be fictitious.” Read more
Economic aspirations and the Indian State (V. Anantha Nageswaran and Gulzar Natarajan)
“Amid the ongoing demonetization debates, a critical missing ingredient is that of state capacity. Would things have been much different if demonetization was planned out in detail and then executed? We would be inclined to argue to the contrary and claim that the Indian State currently does not have the capacity to execute such a project involving national mobilization on a sustained basis without serious deficiencies and failings.” Read more
Currency swap and the reality distortion field (Ajit Ranade)
“Milton Friedman suggested a famous thought experiment of a helicopter dropping cash all over the economy. This would obviously lead to inflation in the short run. Helicopter money is currently in fashion in these times of quantitative easing, when the EU and Japan are struggling to inject some inflation. So is India’s demonetization the obverse of helicopter money, due to the sudden suction of 86% of cash? Not so, because, in theory, all those notes will be replaced with new notes instantly. In practice, this is facing considerable teething difficulty. During that interregnum, it does work as negative helicopter drop, and hence is deflationary in the short run.” Read more
Currency reform: a risky natural experiment (Niranjan Rajadhyaksha)
“The currency reform is a great example of what economists call a natural experiment—albeit a risky one. It is a sudden exogenous shock that completely alters the way participants in an economy take decisions. Such natural experiments usually offer rare insights into the economic process. They are analysed using statistical techniques that are not used in more normal times. Hence, how this decision plays out over a longer period of time needs to be watched carefully rather than jumping to quick conclusions.” Read more
Demonetisation and the battle for the minds and hearts of India (Anil Padmanabhan)
“After preaching so successfully against corruption and elite capture of India in the general election, Modi has now begun walking the talk (no matter how clumsily). And in this, he has cleverly positioned himself as a vanguard of the bottom of the pyramid and the aspirational class (what he defines as the neo middle class).” Read more
Two weeks of cashless in the country (Monika Halan)
“The fear that the government can hit the refresh button at some point in the future will make the die-hard tax evaders move to gold, dollars or other stores of value, but it does put pressure to go legit on a large number of people who were simply playing the game—because this is the game that everybody who was smart played in India. A sudden shock was needed to alert everybody that the government is serious about its fight against corruption. The government will have to follow up with strict measures to come down on future generation of black money, else this entire exercise will be in vain.” Read more
Dear prime minister, the buck stops with you (Tamal Bandyopadhyay)
“The choice before the government was to announce it out of the blue and run the risk of the chaos on streets or have a smooth transition from the old currency notes to new notes but without getting much out of it in terms of unearthing unaccounted cash. It has chosen the first, and rightly so.” Read more
Modi’s demonetisation drive may damage Arvind Kejriwal the most (Kunal Singh)
“Modi’s new market is the middle and neo-middle class and the higher value that he is promising to deliver is the elimination of black money and a significant reduction of corruption. Modi has grabbed the space and message that could so-easily have been Kejriwal’s. The latter may not be possessing illegal cash and hence will not suffer monetarily but his political stocks are likely to go down.” Read more
Demonetisation: Are the poor really suffering? (Krishnamurthy Subramanian and Prasanna Tantri)
“In the political battle that has emerged out of the demonetization exercise, both proponents and opponents are ostensibly defending the interests of the poor. Some politicians are relying on anecdotal evidence to advocate the difficulties being faced by the common man. We instead use data from the National Sample Survey Organization’s (NSSO) survey to estimate such difficulties faced by the poor.” Read more
No, the poor aren’t sleeping peacefully (Salil Tripathi)
“One has to be astonishingly callous or exceptionally removed from reality to think that the poor are sleeping peacefully and only the rich are frightened, needing sleeping pills in the wake of the great currency-exchange drama playing out in India. For that’s what it is; old notes are being replaced with new, and a new note of even higher value is being added.” Read more
Narendra Modi could have done with more emotions (Biju Dominic)
“The demonetisation exercise was planned and is being analysed as an economic activity. What people discount is that demonetisation is inherently a behavioural issue—an emotional issue! The process of removing 86% of the currency notes in circulation and expecting the economy to function with only 14% was bound to create a lot of hardships. Policymakers would have anticipated the monetary and the physical hardships to the common man. But, any overt preparation to minimize the hardship would have let the cat out of the bag and would have defeated the very purpose of this operation.” Read more
Does black money boost economic growth? (Roshan Kishore)
“‘I am very clear on this…black money should not be generated. Economic experts say the magnitude of the global economic crisis at times is not felt in India because of strong (parallel) economy of black money,’ said Akhilesh Yadav, chief minister of Uttar Pradesh on 15 November. Given the lack of transparency in funding of political parties and myriad corruption and disproportionate asset cases which are going on against several politicians in India, it could be tempting to dismiss Yadav’s statement as an apology or even defence for those who have unaccounted income or black money, as it is popularly called in the country. Read more