Note ban, a massive and draconian monetary shock, writes former CEA

Attempts to reason why it was popular and did not affect economic growth more It’s not convincing to argue that the poor were willing to ignore their own hardship during demonetisation, since the rich and the corrupt were undergoing greater hardship, former Chief Economic Adviser Arvind Subramanian writes in his upcoming book. Calling the note ban exercise a “massive, draconian, monetary shock,” Mr. Subramanian, in his book titled ‘Of Counsel: The Challenges of the Modi-Jaitley Economy’, says that increasing the hardship on the poor counter-intuitively has been the precise reason why the move yielded political benefits in the U.P. elections soon after. The former CEA raises two ‘puzzles’ about demonetisation: why was it so popular politically if it imposed such economic costs, and why the removal of 86% of cash did not have a greater impact on economic growth. “I offer the controversial hypothesis that imposing large costs on a wide cross-section of people, unexpected and unintentional though it may have been, could actually have been indispensable to achieve political success,” he says in the book. “One answer to the demonetisation puzzle has been that the poor were willing to overlook their own hardship, knowing that the rich and their ill-begotten wealth were experiencing even greater hardship. “In this view, the costs to the poor were unavoidable collateral damage that had to be incurred for attaining a larger goal.” Collateral damage This is not entirely convincing, Mr. Subramanian writes, since the collateral damage was, in fact, avoidable. Anti-elite populism could have taken the form of other punitive actions such as taxation, appropriation, and raids that were targeted at just the corrupt rich. “Why entangle the innocent masses and impoverish them in the bargain? As I wrote in the Economic Survey of 2016–17, if subsidies are a highly inefficient way of transferring resources to the poor, demonetisation seemed a highly inefficient way of taking resources away from the rich.” Some answers to this puzzle, he argues, could lie in the sheer scale and scope of the note ban. One answer could be that such a broad-based move was intended to serve as a signalling device to the corrupt rich that there was a ‘regime change against black money’. As to the second puzzle of why economic growth was not impacted more by demonetisation, he said one explanation could be that the measures of GDP failed to take into account the informal sector, which felt the brunt of the note ban. “One possibility is that people found ways around the note ban, for example by continuing to use the Rs. 500 note even after its use had been formally banned, so the currency shock wasn’t actually as big as conventionally measured,” he said.

Source :

About sree nivas

Check Also

Corrupt practices under RPA

Corrupt practices under RPA,1951

What is the Representation of People Act, 1951? The electoral framework in India is regulated …

Leave a Reply

Your email address will not be published. Required fields are marked *

Get Free Updates to Crack the Exam!
Subscribe to our Newsletter for free daily updates