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Demonetisation is Modi's boldest intervention to date: Kerala CM's financial advisor

  • Though people praised the move in the beginning the cheer diminished with time
  • Proposal for demonetisation was dismissed in America as administratively impractical
  • Gopinath thinks a gradualist strategy would have been more effective in the long run
Demonetisation Modis boldest intervention Gita Gopinath

While the Communist Party of India- Marxist (CPM) and Kerala's Left Democratic Front (LDF) government seems to be confused over the demonetisation of ₹500 and ₹1000 Kerala chief minister Pinarayi Vijayan's financial advisor Gita Gopinath calls it "Modi’s boldest policy intervention to date." However, she says the introduction of ₹2000 notes undermines the long-term effectiveness of Modi's policy. 

Also read: Will currency ban check black money? Well, our comrades are confused!

The Harvard professor made the remark in an article, titled Demonetization Dos and Don’ts, published on the website project-syndicate. 

The economist says the unprecedented move affected 85% of the money circulation in the country. Though the salaried and poor welcomed the move, in the beginning, the initial cheer diminished with time. The commerce in the country has gone down to a halt, she says.

Gopinath further clarifies that "near-term impact will be the equivalent of an “anti-stimulus” policy intervention," leading to a situation where "negative wealth effect will overwhelm the gains." Even in the USA, a proposal of demonetisation was dismissed by policymakers as an administratively impractical or as an action that won't help to curb criminal behaviour in the long term. 

She further states that as tax evaders also store their wealth in non-monetary forms "questions posed by Modi’s critics about the role of cash in feeding stockpiles of black money are misplaced." 

Kerala Chief Minister's financial advisor further mentions a gradualist strategy, proposed by Kenneth Rogoff in his book The Curse of Cash, which will cause minimum disruption and collateral damage to real economy but will be arguably more effective in the long run, but would not offer "the shock and awe of current approach." Modi had stated that he chose the current approach for its shock and awe on hoarders of black money. 

However, Gopinath admits that the gradualist strategy would fail to punish existing hoarders. The method will help to reduce corruption and improve tax compliance in the long run as lower denomination currency notes are taken out of circulation.  

She also lauds the Jan Dhan program of National Democratic Alliance (NDA) but says most Indians are not using their bank account properly and a cash scarcity under such situations is "economically crippling".


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