Addressing the key criticisms of the ‘demonetisation drive’

/, Economy, Governance, GS Paper 3, Security/Addressing the key criticisms of the ‘demonetisation drive’

Addressing the key criticisms of the ‘demonetisation drive’

Demonetisation of Indian Rs
Let us take the five key criticisms of demonetisation – Flow vs stock, price of real estate and money, SME impact, lower consumption and inconvenience – are more than negated by the long term effects of formalisation. Let’s look at each criticism in diminishing order of importance in more detail:

Flow vs stock:
• Analysts suggest that demonetisation is “merely” a one-time intervention that reduces stock and does nothing about flow (the fresh creation of black money with new currency). They are right; but dealing with stock creates conditions for even more aggressive action on flow. How? You can expect further curbs on cash payments, a smaller number of high-value notes put back into circulation, the application of big data algorithms to saving, consumption and investment data, and much else.
• This builds on previous actions such as goods and services tax (GST), tax deducted at source (TDS) and PAN requirements, the Undisclosed Foreign Income Act, Benami Transactions (Prohibition) Amendment Act, multiple multilateral information exchange agreements, ease of doing business, and the voluntary disclosure scheme. None of them are perfect or complete alone, but seen together, the flow plan is nicely complemented by this stock intervention.

Price of real estate and money:
• India has long mispriced land and money, and analysts suggest a huge impact on both. Analysts suggest that India’s low rental yields of two per cent reflected our black economy because globally rental yields and borrowing rates are similar.
• It is estimated that rental yields will double as the price of residential real estate halves.
• It is also estimated that the shift from black to white savings (banks have received ₹2 lakh crore in deposits on the last two days of last week) could reduce our interest rates by 350 basis points over the next four years. Ending the mispricing of real estate and money is wonderful for entrepreneurship, global competitiveness and job creation.

Bad timing:
• Analysts suggest this could have been timed differently because of the rabi crop, Diwali, and Uttar Pradesh elections. A country of India’s diversity and size will always have some harvest, election or festival coming and a decision of this impact is probably best made in the middle of a government’s tenure rather than too close to the next national election.
• An important part of the fairness of this move was secrecy and surprise; announcing the decision as soon as it was logistically possible with new currency was crucial to its impact.

SME destruction:
• Analysts suggest that many small businesses will not be viable in the white economy because their survival depends on tax or labour law arbitrage.
• A reduction in the number of enterprises is welcome. Of India’s 63 million enterprises, only 8.5 million have any tax registration and only 1.5 million pay Provident Fund.
• The US economy is eight times our size and only has 25 million enterprises. The destruction of low-productivity informal enterprises that don’t pay minimum wages or provide safe working conditions and leave is rather welcome.
• Demonetisation destroys past gains of informality; complementing this with infrastructure building and ease of doing business interventions that reduce regulatory cholesterol could raise formal employment from 10 per cent of our workers to 50 per cent in the next decade.

Lower consumption:
• This is the trickiest to estimate. Analysts agree about short-term pain but are divided on impact. Some suggest pain will be concentrated in the north, rural areas and consumer durables while economist Surjit Bhalla suggests no problem because individual consumption is ₹13,910 per month at the 99th percentile.
• It can be deciphered that the pain will not be as prolonged and as widespread as expected except in jewellery and real estate that delightfully will have a long and overdue cold winter.

Inconvenience:
• This is a real short-term pain but the amount of tears shed by rich people for the inconvenience of poor people and farmers would probably fill an ocean. Poor people don’t have black money and farmers are untaxable.
• This pain would have been greater before Jan-Dhan, Aadhaar, Direct Benefit Transfer, mobile banking, universal payment interface, Bharat Bill payment, new bank licences, mobile wallets, and other financial inclusion measures that are blunting the traditional defence of cash as access.
• A counterintuitive but effective measure to reduce this temporary pain is the ₹2000 note but the numbers of this high value note should be capped and this new accomplice of black money storage should be demonetised in a few years.

Conclusion-
An important upside lost in the black money vaporisation debate is counterfeit money destruction. If you can see the happenings in Kashmir, it is obvious that much of valley terrorism is fuelled by money not printed by India. Getting rid of black money is not the solving of a sum but the painting of a picture; no single action moves the needle but a series of action can change the norms of acceptable, accepted, and expected behaviour.
The boldness of demonetisation suggests a bias for action, however imperfect, after decades of rhetoric. The estimates figuring non-exchange of 12 lakh crore of currency in circulation due to the fear of clamp down by the State authorities, are different by different analysts.
Whatever the final number, as Karl Marx said “Philosophers have only interpreted the world, in various ways; the point is to change it.

Source – Business Standard

By | 2016-11-16T08:00:41+00:00 November 16th, 2016|Categories: Blog, Economy, Governance, GS Paper 3, Security|Tags: , , |0 Comments

About the Author:

Leave A Comment

Contact Info

First Floor, Dainik Bhaskar Building, Sector 25, Chandigarh

Phone: 70870-00447

Mobile: 98147-11661

%d bloggers like this: