Two prominent American economists have widely different views on India’s demonetisation drive. Harvard economist Kenneth Rogoff is of the opinion that the move will help tackle corruption and tax evasion, while Pranab Bardhan, Professor of Economics at the University of California, Berkeley, believes it cannot make “much of a dent in the long-term problem of corruption or black money.” Both of them shared their views with The Hindu through emails on Monday.
“There is little precedent in peacetime for India’s overnight demonetisation of its two largest banknotes. The basic idea of taking old notes out of circulation and introducing new ones is perfectly normal and sensible, but usually this is done gradually over a period of years (per the plan I propose for advanced economies in my recent book The Curse of Cash). India’s approach of forcing a rapid exchange may well succeed in penalising corrupt politicians, criminal and tax evaders far more than a gradual approach would. But even if the move had been well prepared, the collateral damage on ordinary people would still have been significant. The long-run effects of India’s currency exchange on corruption, crime and tax evasion may yet prove so great they will still outweigh the short-run costs but that will depend on implementation,” said Mr. Rogoff.
The Curse of Cash argues for eliminating large notes and not replacing them, which Mr. Rogoff said in a recent blog, “is not aimed at developing countries, where the share of people without effective access to banking is just too large.” But he has been largely supportive of Prime Minister Narendra Modi’s move: “Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid.”
Mr. Bardhan does not agree with this view. “Most business people do not keep their black income under a mattress. They keep it in the form of gold, real estate, commodity stocks, and offshore accounts. Of course, they keep some amount in cash for various current transaction needs, but I doubt it's more than a very tiny percentage of total black money,” he said. “Apart from the tremendous hardship that the poor people are going through, the large informal sector in the economy will find it very difficult and time-consuming to recover from this big blow. Those who think the shrinkage of the informal sector is a good thing, do not realise that this will not suddenly push the informal sector to start using credit card or mobile wallets, or that there are not many formal sector jobs waiting for those who lose their livelihood in the informal sector. The bungling and mismanagement in the implementation of this highly intrusive and disruptive policy so far suggests "maximum government, minimum governance" exactly the opposite of what the Prime Minister had promised in 2014. He and his loyal Finance Minister keep on advising poor people to go digital ("eat cake").”
Mr. Bardhan said, real estate prices will take a hit temporarily, but “when the new notes come, real estate markets will go back to normal, unless some other drastic measures are taken.” “Politicians who had taken out cash to fund the forthcoming elections, say in UP, will get hit. BJP, of course, has the advantage of incumbency over other parties to get funds from its crony capitalists. In any case, things again will go back to normal, after the new notes are in circulation. The first step to curb undocumented election finance is to have regular mandatory and independent auditing of party funds, which no political party (including BJP) has accepted.”
“…this is an awful way of doing it,” Mr. Bardhan said on the objective of curbing counterfeit notes. “Other countries (for example, the US facing the largest amount of counterfeit dollars in the world) do it in stages and quietly.” “Some economists hope that the government will have a windfall revenue gain from the unreturned cash, but this is likely to be cancelled by the diminished revenue prospects from a much slower-growing economy as a result of this policy. In the end this may turn out to be another of Modi's stunts to distract the electorate from his disappointing performance,” said Mr. Bardhan.
