Ajay Shah: A monetary economics view of the demonetisation

Ajay Shah: A monetary economics view of the demonetisation: Money is the lubricant of the economy; a shock to the money supply disrupts the economy and could lead to recession...

A common sense view of demonetization
This refers to Ajay Shah’s article “A monetary economics view of the demonetization” (Snakes & Ladders, November 14). The observation that “Money is the lubricant of the economy” reminds one of a ‘Times View/Counter View’ column about corruption, some years back, where one side argued that ‘corruption is the lubricant of the wheel of economic growth’. The article, by a deft theoretical approach, almost confuses the reader to think that money is cash and reduced amount of money in circulation is, by itself, something bad for the economy.
The decision to demonetize presumes hoarding of high value currency for purposes other than normal genuine transactions, existence of fake currency in the system and evasion of tax by off-the-book high value transactions as in purchase of gold and property. Though there have been initial flip-flops, by and large, it appears, Reserve Bank of India has taken care to ensure availability of currency notes in exchange and for withdrawal from banks. Looks, there was a slip in making ATMs ready to dispense new Rs2000 and Rs500 notes.
While incidents during the first half of last century mentioned in the article should continue to guide us from a historic perspective, their relevance to present Indian context is debatable. Because, slowly the entire world is moving towards a cashless society (different from world without money!) and though India, with the present level of literacy and banking infrastructure, may not be able to keep pace with the developed world, cannot stand still, either.
As regards the success of demonetization now under way, common man would console himself that all the pain was not in vain, even if the measure partially succeeds in ‘purifying’ the economy and checking growth of corruption. The mainstreaming of idle currency will bring a large amount of ‘hidden’ wealth into books of accounts and that definitely have not only positive tax implications, but will be a deterrent to further accumulation of wealth from ugly sources. Compulsion to do more transactions through banking channels will be a disincentive for further ‘import’ or local printing of counterfeit currency.
M G Warrier


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