Skip to main content

Demonetization by itself can't tackle black money, it's one-time tax: Noted economist Bhagwati, a Modi supporter

By Our Representative
Perhaps the world's most powerful voice in favour of Prime Minister Narendra Modi's controversial decision to ban Rs 1000 and 500 notes on November 8, noted economist Prof Jagdish Bhagwati, has said that the move “cannot by itself tackle future of black money”, insisting, the move is no more than “a one-time tax on black money.”
In an opinion piece in a prominent business daily, Bhagwati, who is known internationally for his contribution on free trade, though missed a Nobel prize, simultaneously sharply criticizes those who say that “the return into the formal monetary and banking system of a large percentage, perhaps 80% or more, of the old notes represents a failure of the policy.”
Calling it “a fallacy”, Bhagwati, who is with the Columbia University and is known to be mentor of his Columbia colleague, Prof Arvind Panagariya, vice-chairman, Niti Aayog, says, that it is a “misunderstanding” to state that “unaccounted money that is deposited into bank accounts has been converted successfully without penalty from black into white.”
Pointing to the fact that “the current rules dictate that deposits of unaccounted money will be taxed at 50% – with a further 25% taken by the government (into the Pradhan Mantri Garib Kalyan Yojana) as an interest-free loan for a period of four years”, Bhagwati argues, “The return of money to the formal banking system, when taxed, will generate a fiscal gain to the system.”
Titled “Demonetisation fallacies and demonetisation math”, the article states, however, states,
it is also a “fallacy” to expectation demonetisation “will put an end to black money generation”, insisting, “Demonetisation, by invalidating existing high denomination notes, deals with the stock of black money – but, in and of itself, does nothing to address future flows of black money (which may accrue in the new currency notes).”
Argues Bhagwati, tackling “future flows of black money” would require “further reforms” such as “lowering stamp taxes on property transactions” to incentivize “lower levels of evasion associated with such transactions”, and “electronic registration of real estate transactions (and re-registration of existing ownership claims) to match individual identification numbers.”
Bhagwati believes, the money that “proverbially hoarded under the mattress”, on entering into the “formal financial system via bank deposits”, may now “grow via the classical money multiplier, assuming a portion of it is loaned out by banks. This could, at the margin, have an expansionary impact...”
Further, says Bhagwati, the critics' argument that “the current exercise will not tackle the underlying roots of corruption, which lie in areas such as election finance, burdensome regulation, high taxes, and so forth” is “perfectly true”, though adding, “This criticism misses the centrality of … the idea that, typically, each policy objective requires a specific, targeted policy instrument.”
As to whether demonetisation drive would “penalize those who have introduced counterfeit currency into the system”, Bhagwati argues, “To address this question, one needs to clarify the distinction between stocks and flows”, adding, “At best, to the extent that the security features introduced into new notes limit immediate counterfeiting, the policy may minimize the future flows of counterfeit notes for some time.”
This is the second article Bhagwati has written in favour of demonetization. Like the first one, which appeared as an editorial page commentary in another prominent daily, this article too has been written in collaboration with a group of two other US-based Indian origin scholars.
The first article, more forthright in supporting Modi, said that "demonetisation is a courageous reform that will bring substantive benefits”. It went so far as to say that “the Indian economy will move towards digitisation of economic transactions, with cash currency playing a relatively minor role”, an argument which he does repeal seek to just a week later.

Comments

TRENDING

India's GDP down by 50%, not 23%, job loss 200 million not 122 million: Top economist

By Our Representative One of India’s topmost economists has estimated that India’s Gross Domestic Product (GDP) decline was around 50%, and not 23%, as claimed by the Government of India’s top data body, National Statistical Organization (NSO). Prof Arun Kumar, who is Malcolm S Adiseshiah chair professor, Institute of Social Sciences, New Delhi, said this was delivering a web policy speech, organised by the Impact and Policy Research Institute (IMPRI), New Delhi.

JP advised RSS to give up Hindu Rashtra, disband itself: Ex-IAS officer tells Modi

Counterview Desk
Major MG Devasahayam IAS (Retd), chairman, People-First, in an open letter to Prime Minister Narendra Modi on the occasion of Jayprakash Narain’s (JP’s) death anniversary (October 11) has wondered whether he remembers “a patriot called Jayaprakash Narayan”. Recalling what JP thought on issues such as communalism, freedom, democracy, Hindutva etc., Devasahayam says, Modi has been been doing “the very opposite of the principles and values for which JP lived and died.”

Buddhist shrines massively destroyed by Brahmanical rulers in "pre-Islamic" era: Historian DN Jha's survey

By Our Representative
Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book, "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

UP chief secretary, DGP have 'surrendered' to political diktat: 92 retired IAS, IPS officials

Counterview Desk
In an open letter to Uttar Pradesh chief minister Yogi Adityanath, 92 retired IAS, IFS and IPS bureaucrats, commenting on “blatant violations of the rule law” following the Hathras incident, have blamed that the Chief Secretary and the Director General of Police for abjectly failing to exercise control over a “highly compromised” administration the state.

Hathras reflects Manu's mindset dominates: 'Women are false, it's in their nature to seduce'

By Parijat Ghosh, Dibyendu Chaudhuri*
The woman died and then we woke up to protest. She was alive for two weeks after the heinous incident. Many of us even didn’t notice what had happened at Hathras, how she fought during the next 15 days. Those who noticed, many of them were not sure what actually had happened. So much so, we as a nation were more busy in finding out who among the Bollywood actresses were taking drugs, who smoked weed, who had ‘inappropriate’ or more than one relationship, what kind of private conversations they had in their chat boxes and what not!

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.

Atrocities against Dalits: Why don't MPs, MLAs from the community ever speak up?

By Vidya Bhushan Rawat*
In Gujarat, a young Dalit activist lawyer Devji Maheshwari, belonging to the Backward and Minority Communities Employees Federation (BAMSCEF) was killed in Surat, allegedly by a goon who was warning him against his Facebook posts not to speak up against Brahmanism. Facts have come to light suggesting there are other issues also which led to the murder, mostly related to land disputes, many a time ignored by activists.

Delhi riots: Even British didn't accuse Bhagat Singh of reading Lenin, Jack London

By Vikash Narain Rai*
After the #BlackLifeMatters movement seriously tested the credibility of police across America, the Houston police chief Art Acevado talked of ending “lawful but awful” policing. No comparison, but in India, a citizens’ committee comprising former top judges and bureaucrats is now set to inquire into the role of the state machinery and media in handling the February 2020 Delhi violence, which followed protests against the Citizenship Amendment Act (CAA), “as the investigation by the Delhi Police has evoked extensive critical commentary in recent times.”

Human rights 'abuses': Funding to India should be vetted, Greens tell Australian govt

Counterview Desk
A roundtable organised by Australian Greens, which is the third biggest political group in the country, held to discuss human rights situation in India at the New South Wales Parliament in Sydney has insisted that parliamentarians, human rights activists and lawyers should play a more active role “standing up for human rights not just in their own places but also in India.”