Skip to main content

Foolhardy to assume demonetization would extinguish black money, govt research paper

By Rajiv Shah
Did Prime Minister Narendra Modi go ahead with demonetisation of Rs 500 and 1000 notes without allowing any expert analysis of the impact it might have on the economy? It would seem so, if a recent paper by a research team attached with a Union finance ministry outfit is any indication.
Terming the step “a large shock to the economy”, the research paper says, the Government of India has been arguing that the cash that would be extinguished would be “black money” and hence, should be rightfully extinguished to set right the perverse incentive structure in the economy.
Pointing out that “this argument is based on impressions rather than on facts”, the paper argues, “Facts are not available to anybody” on what might happen, and that “it would be foolhardy to argue that this is the only possibility.”
Titled “Demonetisation: Impact on the Economy”, the paper has been prepared by researchers Dr Kavita Rao, Dr Sacchidananda Mukherjee, Dr Sudhanshu Kumar, DP Sengupta, Suranjali Tandon and Hari Nayudu of the National Institute of Public Finance and Policy (NIPFP), New Delhi.
The researchers say, “If this currency is extinguished there would be a contraction of economic activity in the economy”, giving the example of a small trader depositing Rs 2 lakh in the jan dhan account, saying, “Since the currency in which he held these balances in for transactional purposes has been scrapped, it would be incorrect to interpret this as success of the programme in bringing in people who were hiding black money.”
Pointing out that sectors that would particularly impact include “transport services, kirana, fruits and vegetables and all other perishables”, the scholars says, they would “would face compression in demand which is backed by purchasing power.”
The scholars strongly dispute those who say that, as supply would exceed demand, there would be a fall in prices, saying, “If supply too gets curtailed for want of a medium of exchange, prices might, in fact, rise.” They add, “The expectation that inflation would decline might be belied.”
The scholars believe, while “the demand from segments which have access to digital medium of exchange would remain unaffected”, as for the rest of the economy, it would get compressed, and “this would transmit the effect to the rest of the sectors in the economy.”
As for the real estate, the paper says, “contraction in demand” of unaccounted incomes would mean fall in its transactions, with some activities ceasing to happen, adding, the compression in investments in the construction sector “can have adverse income and employment.”
Coming to the impact on the agricultural sector, the paper says, “This is the sowing season for the Rabi crop in some parts of the country and the harvesting season for the Kharif crop. Most of the purchases and sales in this segment of the economy are carried out through cash.”
“With the elimination of cash from the economy, sale of kharif crop would be difficult unless the crop is sold on the promise of payment in future”, the scholars say, adding, “Given the limited bargaining power of the farmer, the price they can realise for the crop can be adversely affected.”
“On the other hand”, according to the scholars, “in the sowing activity, people would not get access to the inputs required since most of the inputs are now purchased from the market unless they seek access to credit from the supplier. In other words, with demonetisation, there would be a significant strengthening of the informal sector credit market in the rural economy.”
At the macro level, the paper says, the official expectation appears to be that the cash being extinguished would result lead to the possibility of “expansion in potential credit creation” because of “sufficient demand for credit.”
Disputing this view, they say, “It is not correct to assume that expansion in credit will definitely materialize… Demonetisation has been introduced in an environment where demand for credit is rather low. A compression in demand in the economy would further depress the sentiment driving investments.”

Comments

Unknown said…
IF you are a student you may find these tips on how to write research paper useful.

TRENDING

MG-NREGA: A global model still waiting to be fully implemented

By Bharat Dogra  When the Mahatma Gandhi National Rural Employment Guarantee Act (MG-NREGA) was introduced in India nearly two decades ago, it drew worldwide attention. The reason was evident. At a time when states across much of the world were retreating from responsibility for livelihoods and welfare, the world’s second most populous country—with nearly two-thirds of its people living in rural or semi-rural areas—committed itself to guaranteeing 100 days of employment a year to its rural population.

Grueling summer ahead: Cuttack’s alarming health trends and what they mean for Odisha

By Sudhansu R Das  The preparation to face the summer should begin early in Odisha. People in the state endure long, grueling summer months starting from mid-February and extending until the end of October. This prolonged heat adversely affects productivity, causes deaths and diseases, and impacts agriculture, tourism and the unorganized sector. The social, economic and cultural life of the state remains severely disrupted during the peak heat months.

A comrade in culture and controversy: Yao Wenyuan’s revolutionary legacy

By Harsh Thakor*  This year marks two important anniversaries in Chinese revolutionary history—the 20th death anniversary of Yao Wenyuan, and the 50th anniversary of his seminal essay "On the Social Basis of the Lin Biao Anti-Party Clique". These milestones invite reflection on the man whose pen ignited the first sparks of the Great Proletarian Cultural Revolution and whose sharp ideological interventions left an indelible imprint on the political and cultural landscape of socialist China.

Concerns raised over move to rename MGNREGA, critics call it politically motivated

By A Representative   Concerns have been raised over the Union government’s reported move to rename the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), with critics describing it as a politically motivated step rather than an administrative reform. They argue that the proposed change undermines the legacy of Mahatma Gandhi and seeks to appropriate credit for a programme whose relevance has been repeatedly demonstrated, particularly during times of crisis.

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Rollback of right to work? VB–GRAM G Bill 'dilutes' statutory employment guarantee

By A Representative   The Right to Food Campaign has strongly condemned the passage of the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) (VB–GRAM G) Bill, 2025, describing it as a major rollback of workers’ rights and a fundamental dilution of the statutory Right to Work guaranteed under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In a statement, the Campaign termed the repeal of MGNREGA a “dark day for workers’ rights” and accused the government of converting a legally enforceable, demand-based employment guarantee into a centralised, discretionary welfare scheme.

Why India must urgently strengthen its policies for an ageing population

By Bharat Dogra   A quiet but far-reaching demographic transformation is reshaping much of the world. As life expectancy rises and birth rates fall, societies are witnessing a rapid increase in the proportion of older people. This shift has profound implications for public policy, and the need to strengthen frameworks for healthy and secure ageing has never been more urgent. India is among the countries where these pressures will intensify most sharply in the coming decades.

From jobless to ‘job-loss’ growth: Experts critique gig economy and fintech risks

By A Representative   Leading economists and social activists gathered in the capital on Friday to launch the third edition of the State of Finance in India Report 2024-25 , issuing a stark warning that the rapid digitalization of the Indian economy is eroding welfare systems and entrenching "digital dystopia." 

School job scam and the future of university degree holders in West Bengal

By Harasankar Adhikari  The school recruitment controversy in West Bengal has emerged as one of the most serious governance challenges in recent years, raising concerns about transparency, institutional accountability, and the broader impact on society. Allegations that school jobs were obtained through irregular means have led to prolonged legal scrutiny, involving both the Calcutta High Court and the Supreme Court of India. In one instance, a panel for high school teacher recruitment was ultimately cancelled after several years of service, following extended judicial proceedings and debate.