'Demonetisation is a one-time clean-up of black money'

Updated: 10 December, 2016 11:06 IST | Pallavi Smart |

In lecture at IIT-Bombay, eminent economist Kaushik Basu calls the demonetisation move a misstep, says govt should go back to old Rs 500 notes

IIT-B director Devang Khakhar with Kaushik Basu
IIT-B director Devang Khakhar with Kaushik Basu

Delivering a lecture on the economics of corruption, black money and demonetisation at the Indian Institute of Technology- Bombay (IIT-B) yesterday former World Bank chief economist and senior vice president Kaushik Basu called the government’s move to scrap the Rs 1,000 and Rs 500 notes a misstep.

Basu suggested the government to go back to the old R500 notes. “The government should take the responsibility. People will get angry, but it will help save the economy from larger damage,” said Basu.

One-time clean up
Giving a point-by-point breakdown of the government’s reasoning behind demonetisation from the Finance Ministry’s press release, Basu said, “It will act on fake currency but soon, there could be fake currency of new notes; every country faces a fake currency problem. It will not help control inflation. Bringing back black money is also not possible, as it has already been converted in other forms. And lastly, India is not in a position to take the leap for a cashless economy, even the USA will take 10 years to do so. In fact, 98% of transactions in India depend on cash. So at best, this is a one-time cleaning up of black (money) stash which also cannot be repeated at intervals as it will make the public lose faith in currency.”

Demonetisation of 1978
Recalling the other demonetisation, which was done in 1978, Kaushik presented proof of how it affected the economy. He said, “After Rs 1,000 notes were demonetised in 1978, the economy had the worst growth in 1979-80. Indian economy shrunk to negative points.”

“Until two months ago, when I was at the World Bank, India was leading in the chart of developing economies at 7.6 per cent. This, however, will drop to 7 or 6.9 per cent, which even the RBI has expressed. However, it may fall further in the next year,” added Basu.

Basu said farmers will be most affected and service sector will see harmful effects and middle class will face the jolt of the shortfall in money.

Praise for GST
Basu spoke positively of the Goods and Services Tax (GST), “People in India are so fed up of black money and corruption that any action on it will be received positively. However, the political support enjoyed by the government will soon go away. In fact, GST is something to be celebrated in the Indian economy,” said Basu.

First Published: 10 December, 2016 07:44 IST

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