Skip to main content

Foolhardy to assume demonetization would extinguish black money, warns Finance Ministry 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

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

TRENDING

Noam Chomsky, top scholars ask NRIs to take stand on human rights violations in India

Counterview Desk
Renowned world scholars, including Noam Chomsky, James Petras, Angela Davis, Fredric Jameson, Bruno Latour, Ilan Pappe, Judith Butler, among others, have issued a statement castigating the Narendra Modi government for allegedly creating an environment of fear through arrests, intimidation and violence.

Actionable programme for 2019 polls amidst lynch mobs, caste violence, hate mongering

Counterview Desk
Reclaiming the Republic, a civil rights network, has released a document prepared under the chairmanship of Justice AP Shah (retired) -- and backed, among others, by Supreme Court advocate Prashant Bhushan, bureaucrat-turned-human rights activist Harsh Mander, economist Prabhat Patnaik, Right to transparency activist Anjali Bhardwaj and social scientist Yogendra Yadav  (click HERE for full list) -- with the "aim" of putting forth policy and legislative reforms needed to “protect” and “strengthen” the Constitutional safeguards for India’s democratic polity.

India under Modi "promoted" crony business, protected financial fraudsters, fueled bigotry

By Sandeep* and Rahul Pandey**
Narendra Modi's ascension to power was accompanied with jubilation and expectation. His supporters were expecting an end to era of corruption and initiation of good governance which was described as Achche Din. His party's adherence to idea of nationalism was believed to make India a vibrant country and guide India to be a world leader. He gave the slogan of 'Sabka Saath, Sabka Vikas' conveying that his government was for all.
Corruption The government system is infested with corruption. A minimum of 10% is siphoned off from government schemes and projects, some of which goes back to political party in power and remaining is pocketed by various administrative, executive and political functionaries. This corruption continues and has increased. Now an additional Rashtriya Swayamsewak Sangh (RSS) person working as Official on Special Duty or some equivalent position in every government department also has a share in this booty.
The Narendra M…

Call to support IIM-Bangalore professor, censured for seeking action against Uniliver

Counterview Desk
Sections of the Indian Institute of Managements (IIMs) across India have strongly reacted to the decision to censure Dr Deepak Malghan, a faulty at IIM-Bangalore. Prabhir Vishnu Poruthiyil, who is faculty at IIM-Tiruchirapalli, has sought wider solidarity with Dr Malghan, saying, "The administration has censured Deepak for merely suggesting a meaningful action against Hindustan Unilever for their abysmal environmental record" by “disinviting” it for campus placement.

Inviting Rajapaksa to India "insult" to 1,40,000 Tamils killed by Sri Lankan army

Counterview Desk
In the context of Sri Lankan opposition leader Mahinda Rajapaksa being invited in India, about 75 human rights activists*, claiming to be concerned about rights violations during the civil war in Sri Lanka, especially in 2009, have joined together to express their dissent through a statement.

Modi wants Pak govt be held responsible for JeM terror strike: World doesn't agree

By Sandeep Pandey*
I went to participate in a candle light homage paying event at Dr BR Ambedkar's statue organised by about 200 Dalit students on Hazratganj main crossing in Lucknow on February 16, 2019 evening, two days after the dastardly terrorist act in Pulwana, Jammu and Kashmir (J&K), in which 44 Central Reserve Police Force (CRPF) personnel was killed.

Post-advisory, Govt of India appears reluctant to ban e-cigarettes, "harmful" to kids

By Rajiv Shah
Is the Government of India dilly-dallying over the issue of banning e-cigarettes, which have been declared by anti-tobacco activists across the world as providing “an entryway to nicotine addiction”, especially among the kids? It would seem so, if the latest developments are any guide.

A Godse legacy? BJP rulers have "refrained" from calling Gandhi Father of the Nation

By Dr Hari Desai*
What an agony! On one hand, the entire India is celebrating the 150th birth anniversary of Mahatma Gandhi under the leadership of Prime Minister Narendra Modi, but on the other side, so-called Hindu Mahasabha members have been found mock-enacting the killing of the Mahatma and celebrating the murder by distributing sweets!

No aadhaar, no ration? Hard blow by Gujarat govt on poor and marginalized

By Pankti Jog*
Only those who have aadhaar registration and linked it with ration card will get ration from a Public Distribution System (PDS) shop. This decision of the Gujarat government has hit very badly thousands of poor and marginalized communities of Gujarat, especially during the drought year.

World Bank needs a new perspective on development, not just a new president

By Maju Varghese*
The resignation of the World Bank President Jim Yong Kim was an unexpected development given the fact that he had three more years to complete his tenure. Resignations at such a high level after bidding for a second term is unusual which prompts people to think what would have led to the act itself.