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Top economists are divided on demonetisation: Who said what?

According to reports, Prime Minister Narendra Modi's crackdown on black money and tax evaders by scrapping Rs 500 and Rs 1,000 rupee banknotes has taken the economy down a very bumpy road. How bumpy depends who's talking!

BT Online | December 5, 2016 | Updated 19:45 IST
Top economists are divided on demonetisation: Who said what?


Amartya Sen: Demonetisation was a despotic act

Amartya Sen

In an interview to NDTV, Nobel Laureate and eminent economist Amartya Sen said, "The demonetisation of currency was a despotic act as the government broke the promise of compensation that comes with a promissory note." "Demonetisation goes against trust. It undermines the trust of entire economy," Sen further said.

Earlier while speaking to The Indian Express, Professor Sen said, "Only an authoritarian government can calmly cause such misery to the people - with millions of innocent people being deprived of their money and being subjected to suffering, inconvenience and indignity in trying to get their own money back."

Terming the move as authoritarian, Sen told Express: "Telling the public suddenly that the promissory notes you have, do not promise anything with certainty, is a more complex manifestation of authoritarianism, allegedly justified - or so the government claims - because some of these notes, held by some crooked people, involve black money. At one stroke the move declares all Indians - indeed all holders of Indian currency - as possibly crooks, unless they can establish they are not."

Kaushik Basu:
Demonetisation is likely to fail

Kaushik Basu

"Demonetization was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come," leading economist Kaushik Basu wrote in The New York Times.

He further said that when the government announced demonetisation, it justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes, as well as to dampen inflation.

"Both these justifications are flawed. Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation," Basu wrote.

Dr Manmohan Singh:
Demonetisation can bring GDP down by 2 per cent

Dr Manmohan Singh

Former Prime Minister Manmohan Singh slammed the demonetisation of Rs 500 and Rs 1,000 notes and called it a "monumental mismanagement" that might bring GDP down by 2 per cent.

"In my opinion that the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sector of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 per cent as a result of what has been done. This is an underestimate," Dr Singh said.

Dr Singh also highlighted how this move was affecting the people from marginalised sector. He said: "Prime Minister has said that we should wait for 50 days. Well, 50 days is a short period. But for those who are poor and from the deprived sections of the society even 50 days torture can bring about disastrous effects. And that's why about 60 to 65 people have lost their lives, maybe more. And what has been done can weaken and erode our people's confidence in the currency system and in the banking system."


Arvind Virmani: Demonetisation is a useful method of flushing out black money

Arvind Virmani

Economist and former Indian representative to the IMF Arvind Virmani reportdely said that demonetisation is a useful method of flushing out black money, given that a large percentage of cash holding is in these two denominations.

"The manner in which it was implemented is not surprising - such actions are always secret till announced, so that insiders do not take advantage of the information at the cost of the outsiders," The Wire quoted Virmani as saying.

Speaking on its short-term impact on business community, Virmani said: "How it will affect requires a deeper study, but the first thing one knows is when you demonitise such a large proportion of currency, the immediate effect is a collapse of retail trade in goods and services.

He further said the currency needed for everyday transactions has to be replaced quickly. "The longer that is delayed, the more the negative effect," he said.

Bibek Deb Roy: Criticism of demonetisation not fact-based

Bibek Deb Roy

In an interview to India Today, member of the Niti Ayog Bibek Deb Roy responded to the critics of demonetisation and said that critics are unaware of the situation on ground, the extent of financial inclusion that has been undertaken by the Modi government, and how the revenue generated will help in enhancing public investment.

Debroy told PTI that economists who live out of India normally do not have accesss to the latest data, and are hence more prone to drawing conclusions that may not hold true in the present situation.

"They (economists living abroad) base their understanding essentially on reading English newspapers. Otherwise, how would they know? English language newspapers understood many things wrongly," PTI quoted Debroy as saying.

Roy also reacted on comments of former World Bank Chief Economist Kaushik Basu on demonetisation. He said: "Where does Dr Basu work now? He is based in US. I have a great deal of respect for him…That someone who is away from India may not necessarily be aware what is happening in India."
Surjit Bhalla: Demonetisation is a "bold step" and bigger than GST

Surjit Bhalla

Surjit Bhalla terms the demonetisation move a 'bold step'. "There should be no question that this BJP policy is bold and courageous. The trading community has long been identified as the BJP's core constituency and Prime Minister Narendra Modi has gone against this powerful support group. So let us give Modi a considerable amount of credit for taking a bold step for the country - genuinely in the name of the nation," he wrote in The Indian Express.

He also argued the the fight against corruption and black money in India has just begun. "If successful, this will go down as the biggest reform in India, bigger than the GST (though the two are related) and bigger than the industrial policy reform of 1991. But, and there is a but, while the policy is very effective in its attack on past black money, it is silent on the creation of money."

"Most of the spending of this black money is for expenditures on gold, purchase of foreign exchange, and purchase of real estate. Transfer of money abroad into 'anonymous' accounts is now a difficult exercise for all the world's black money residents. Gold purchases and hoarding are also becoming more difficult. So, the prime outlet for big-time black money use is real estate," he added.


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