The economy in the time of Narendra Modi: Pulapre Balakrishnan
“Impact of demonetisation
All this is from a macroeconomic point of view. To be fair to the government, we must acknowledge its other programmes. Admittedly there are several but it is demonetisation that it thinks of as its showpiece. Claims made have been the ending of corruption and tax evasion. So far we can only be certain that there was an immediate slowing of growth in the formal sector of the economy after November as reflected in the Index of Industrial Production. It is too early to establish what the impact will be on tax revenues but it is difficult to imagine that demonetisation will achieve more for revenues than the Goods and Services Tax. Interestingly, in his book The Curse of Cash, the guru of the “less cash” movement, Kenneth Rogoff, presents data that show countries with a relatively high cash-to-GDP ratio, such as Japan and Switzerland, having smaller underground economies than some such as the Scandinavian ones recording “far far” less cash. It may be noted that in Japan the said ratio is 50% higher than in India. No one thinks of Japan as backward. So, with demonetisation, has the government caused output loss without clear gains elsewhere in the economy? And if the argument was that large denomination notes abet corruption, it is difficult to comprehend the replacement of the 1,000 currency note with a 2,000 note, with its inconvenience. It is clear from this that politicians and economists do not employ daily-wage earners.”


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