Skip to main content

Modi's demonetization was bad idea, is badly executed, would lead to institutional failure, warns "The Economist"

Demonetization as seen by "The Economist" 
In a scathing critique of Prime Minister Narendra Modi’s demonetization drive, top British weekly “The Economist”, in its print edition dated December 3, has controversially commented that that “withdrawing 86% by value of the cash in circulation in India was a bad idea”, and is being “badly executed.”
Quoting John Maynard Keynes, whose ideas fundamentally changed the theory and practice of macroeconomics following post-first world war recession, “The Economist” quotes him as disapproving of VI Lenin’s demonetization in Soviet Russia in 1919 thus: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
“Trust is fragile, and precious”, “The Economist” warns in its commentary titled “The dire consequences of India’s demonetisation initiative”, adding, “Managing an economy’s money is among the most important tasks of the government. Clumsy use of monetary instruments comes with high risk.”
The weekly insists, “More financially mature economies than India would struggle to cope with such a scheme, but this one floundered at once. Though Indians have until the end of the year to swap their defunct bills, the roll-out of new ones has been bungled.”
Pointing out that critics are “rightly” aghast, the powerful periodical which is most widely read among intelligentsia across the world, the weekly says, “Much of the wealth of those enriched by the black economy would be insulated, because lots of their lucre is held not in cash but in property, gold or jewellery.”
It adds, “Such heavy-handed measures could undermine the credibility of important government institutions. Fear that they might be used again in future could weaken confidence in the currency as a store of value—paving the way for some broader institutional failure, like hyperinflation.”
Underlining that “long-run trust in the judgment of the state might be threatened”, the weekly says, “A broad cash crunch and broken supply chains threaten a sharp economic slowdown... India’s ‘demonetisation’ is a cautionary tale of the reckless misuse of one of the most potent of policy tools: control over an economy’s money.”
“Some economists hope the money will be recycled back into the economy through a fiscal stimulus, which might help soothe some of the pain caused by demonetization”, “The Economist” says, though adding, “The status of this would-be windfall is uncertain.”
“However clever the plan looked on paper”, the weekly says, “It is both extraordinarily blunt and risky. Demonetisation will probably make only limited strides in shrinking the black economy while affecting all of India’s 1.3bn citizens, the poorest most of all.”
“In much of the Indian economy, and especially outside big cities, where cash transactions are most common and financial infrastructure least developed, the sudden invalidation of a vast amount of outstanding currency represents a significant monetary shock”, it says.
“Not all of India’s shadow economy—which provides real employment and income, if not real tax revenues—can migrate quickly and easily above board. Whatever cannot easily be shifted represents a potential loss of economic activity, and a drag on broader Indian economic growth”, it predicts.
“Similarly”, it says, “If a cash crunch forces small firms without access to credit to shut down, the eventual alleviation of the cash shortage might not lead to an immediate and complete revival of economic activity.”

Comments

TRENDING

When Pakistanis whispered: ‘end military rule’ — A Moscow memoir

During the recent anti-terror operation inside Pakistan by the Government of India, called Operation Sindoor — a name some feminists consider patently patriarchal, even though it’s officially described as a tribute to the wives of the 26 husbands killed in the terrorist strike — I was reminded of my Moscow stint, which lasted for seven long years, from 1986 to 1993.

Revisiting Gijubhai: Pioneer of child-centric education and the caste debate

It was Krishna Kumar, the well-known educationist, who I believe first introduced me to the name — Gijubhai Badheka (1885–1939). Hailing from Bhavnagar, known as the cultural capital of the Saurashtra region of Gujarat, Gijubhai, Kumar told me during my student days, made significant contributions to the field of pedagogy — something that hasn't received much attention from India's education mandarins. At that time, Kumar was my tutorial teacher at Kirorimal College, Delhi University.

Tracking a lost link: Soviet-era legacy of Gujarati translator Atul Sawani

The other day, I received a message from a well-known activist, Raju Dipti, who runs an NGO called Jeevan Teerth in Koba village, near Gujarat’s capital, Gandhinagar. He was seeking the contact information of Atul Sawani, a translator of Russian books—mainly political and economic—into Gujarati for Progress Publishers during the Soviet era. He wanted to collect and hand over scanned soft copies, or if possible, hard copies, of Soviet books translated into Gujarati to Arvind Gupta, who currently lives in Pune and is undertaking the herculean task of collecting and making public soft copies of Soviet books that are no longer available in the market, both in English and Indian languages.

A conman, a demolition man: How 'prominent' scribes are defending Pritish Nandy

How to defend Pritish Nandy? That’s the big question some of his so-called fans seem to ponder, especially amidst sharp criticism of his alleged insensitivity during his journalistic career. One such incident involved the theft and publication of the birth certificate of Masaba Gupta, daughter of actor Neena Gupta, in the Illustrated Weekly of India, which Nandy was editing at the time. He reportedly did this to uncover the identity of Masaba’s father.

A sector under siege? War and real estate: Navigating uncertainty in India's expanding market

I was a little surprised when I received an email alert from a top real estate consultant, Anarock Group , titled "Exploring War’s Effects on Indian Real Estate—When Conflict Meets Concrete," authored by its regional director and head of research, Dr. Prashant Thakur. I had thought that the business would wholeheartedly support what is considered a strong response to the dastardly terrorist attack in Pahalgam, Operation Sindoor. 

Adani Group a key player in Indo-Israel defence cooperation: Tel Aviv daily

Said to be one of the most influential Israeli dailies, "Haaretz" (literally: News of the Land) has identified the Adani Group—known to be close to Prime Minister Narendra Modi—as one of the key Indian business houses engaged in defence cooperation with Israel. Pointing out that India supplied the Israeli military with Hermes 900 drones, the daily reported that this advanced aerial vehicle came off “the production line in a factory set up in Hyderabad, as part of the cooperation between the Israeli Elbit and India's Adani Group.”

Environmental concern? Global NGO leads campaign urging banks to cut ties with Odisha steel project

A decade after the withdrawal of the South Korean multinational POSCO from Odisha following large-scale protests, questions remain about whether India-based JSW Steel, which took over the project, can successfully revive the 13.2 million tonnes per annum (MTPA) steel plant and coal-fired power plant. POSCO initiated the project in 2005 but exited in 2017 due to sustained local opposition.

Despite Hindutva hold claim, 18% Hindus in US don't want to be identified with Hinduism!

Scanning through news items on the Google News app on my mobile — which is what I do almost every morning — I came across a story published on India.com, which I found somewhat misleading. The headline said, "Muslim population drops significantly in THIS country as over 25% Muslims leave Islam due to…, the country is…"

Beyond Indus water treaty suspension: A 'nationalist' push despite harsh climate realities

The suspension of the Indus Water Treaty (IWT) appears to have pushed the middle classes, at least in Prime Minister Narendra Modi's home state, Gujarat, further towards what the powers-that-be would consider—a "positive" direction. As usual, during my morning walk, I tried talking with a neighbour about what impact it would have. Ignoring what is widely considered a "security lapse," this person, who had just returned after buying milk, compared the Modi move with Trump.