Big Bang or a Big Flop: Top Economists Debate Demonetisation

PANAJI:
Prime Minister Narendra Modi’s dramatic decision to demonetise currency may have been announced with a bang on the of November 8 2016, but the issue of introduction of new series of currency notes had been pending with the RBI since 2010, according to former Reserve Bank of India deputy governor R. Gandhi, who was the man in-charge of one of the country’s biggest economic measures.
Speaking at a seminar on the Effects of Demonetisation on Business & the Economy organised by premier B-school, Goa Institute of Management (GIM) to qualitatively discuss and deliberate the positive and negative impact of demonetisation, Gandhi has also spelt out measures like placing an upper limit on cash transactions as the way ahead post demonetisation.
“The decision was pending since 2010,” he said, at the seminar organised by GIM which was also attended by Dr. Omkar Goswami, Founder & Chairperson, Corporate & Economic Research Group, Dr. C. Rammanohar Reddy, Former Editor, Economic and Political Weekly and Dr. Arun Kumar, formerly with the Jawaharlal Nehru University and currently Malcolm Adiseshaiah Chair Professor, Institute of Social Sciences, New Delhi. The event was chaired by Nasser Munjee, Chairman, Board of Governors, GIM.
Calling demonetisation as a “rightly timed step”, Gandhi said, that the bold move led to a significant growth in bank deposits, an increase in gross value added to cash ratio to 2.37, an increase in public deposits by as much as Rs. 5 lakh crore and a change in financial transaction habits from cash to non-cash modes.
“Now, there is fear in people’s minds after demonetisation of Rs. 2000 notes, which is a good deterrent in accumulation of black cash,” he said, while also advocating “an upper limit on usage of currency”.
Recalling one of the behind-the-scenes facets, which went into the execution of remonetisation of banks and printing of currency, Gandhi said: “A lot of planning was involved in designing the notes. There was a high capacity paper mill that was set up in Mysore. Additional modes of transport were used such as airways during demonetization”.
Munjee, while calling demonetisation as the “most dramatic and drastic event” ever witnessed in India, questioned as to whether the move actually dealt with black money, but conceded that in the post demonetisation era, digital transactions had seen a spurt. But there has been a price to pay, he pointed out. “Demonetization created uncertainty, changed tax policies and deterred investment,” the top banker said.
Presenting a structured analysis, Dr. Goswami questioned the wisdom of the demonetisation move, which he said had failed in Ghana in 1982, Nigeria in 1984, Myanmar in 1986, Soviet Union in 1991, North Korea and Zimbabwe, which resulted in peril for the populations of the respective countries.
Thinking aloud as to whether Modi had actually consulted an economist before taking the decision, Dr. Goswami said that India’s output as well as its Gross Domestic Product (GDP) had taken a hit as a result.
Goswami however did applaud the RBI, for managing the post demonetisation logistics of supplying cash throughout India. “RBI did a fantastic job, supplying cash across length and breadth of the country,” he said. It was still too early to spell out whether the move was good for India, he also said.
Dr. Arun Kumar also criticised demonetisation, claiming it was error to presume that “black is cash” and pointed out that counterfeit currency, whose elimination was one of goals of demonetisation, was only a small part of the total money supply in the economy. The move he said, has also triggered a crisis in India’s banking system. “Deposits increased, but little increase in lending led to an increase in the costs without any increase in income,” the academician observed.
“The impact expected for two to three months, but extended after that as farmers protests were seen in May and June. The informal sector was affected the most,” explained Dr. C. Rammanohar Reddy, Former Editor, Economic & Political Weekly.
Ajit Parulekar, Director GIM remarked that in the year post demonetisation, the tenor of the political debates was more passionate than factual, adding that the educative seminar would fill up that void.
“We have to organize seminars like this for the benefit of Goan industry, society and students,” he said.