The following graph represents the behavior of currency in circulation in India over the past two years following the demonetization announcement on November 8, 2016. The giant dip you notice is immediately following the announcement that rendered Rs. 500 and Rs. 1000 currency notes illegal. They contributed 86% of currency in circulation at the time. It took about two years for the currency in circulation to be back at the pre- demonetization level.
I reviewed the book Monetary Policy in India: A Modern Macroeconomic Perspective edited by Chetan Ghate and Kenneth M Kletzer, Springer, 2016 for EPW recently.
Overall, the articles in the book represent a significant and substantial contribution to the literature on monetary policy of India- definitely from the point of view of application of dynamic macroeconomic models to the policy environment of a typical developing economy.
NPR’s Planet Money did a two part podcast on Anil Bokil and his organization Arthakranti who convinced Prime Minister of India Mr. Narendra Modi about demonetization as a solution to India’s poverty, corruption, and black money related problems. This was back in 2013 when Mr. Modi was Chief Minister of Gujrat.
Arthkranti is a plan conceived by some accountants and engineers to curb corruption and improving tax compliance in India. According to them, limiting the use of cash is one of the solutions. I have already talked about what is wrong with this solution here, here, and here. I also wrote a critique of Arthakranti proposals few years ago while I was grad student and did not think that anyone would take these proposals seriously!
Nonetheless, it is interesting to hear what Mr. Bokil has to say. NPR guys did a good job here.
I thank J P Konning for making me aware of this podcast through one of his tweets.
My paper on Demonetisation is now published at the Economic & Political Weekly as Demonetisation through Segmented Markets: Some Theoretical Perspectives.
The analysis therein concluded that there would be a decrease in real GDP over the next few quarters as all the adjustments forced by the demonetisation pan out. The extremely slow remonetisation of the economy on account of shortage of new cash and poor logistics only seemed to be reinforcing this conclusion. Therefore, the recently released GDP growth estimate of 7.1% does not make sense. It has surprised economists and political commentators alike. For example, Ajit Ranade expresses his surprise in the following tweet:
Expressing doubt about the estimates, Mihir Sharma at Bloomberg asks if the Indian data is going the Chinese way. So how do we explain this estimate when economists as well as the IMF predicted the growth to be down to 6%? The analysis put together by The Wire based on interviews of some economists suggests the following possible reasons:
- The downward revision of Q3 F16 growth is pushing up the growth estimate for the current quarter. This downward revision could be because of poor agricultural growth in 2015-16.
- Pile up of inventories in the distribution channels could have been recorded as increased consumption expenditure. This is the channel stuffing phenomenon where the wholesalers pushed goods down the distribution channel still probably expecting the sales to revive after remonetisation.
- The rich may have spent on big ticket commodities like cars. For e.g. Maruti Suzuki recorded some increase in revenue pushing durable consumption expenditure up.
- The official GDP estimates don’t really measure informal sector activity with accuracy and it is the informal sector (unconnected households and firms) that has been hit very hard by demonetisation.
If the above reasons are true, then the growth estimate would most likely be revised downward later as data catches up with the decline in economic activity. However, for now the BJP government and Prime Minister Modi could take all the credit for the improved growth and boost their political capital when it matters given the UP elections.
Here is the link to my article, “How India can reduce the size of its black economy” in thewire.in
It is partially based on an earlier blogpost on the same topic.
Read my latest paper on the Great Indian Demonetisation Experiment here.
The analysis is based on a simple textbook version of a segmented markets model (Williamson 2011). I prepared this is as a teaching note and therefore is fairly non-technical. The reference to an older edition of Williamson’s brilliant text is because the segmented markets model has been dropped from its subsequent editions to accommodate latest macroeconomic developments in the developed world.
Williamson S (2011), Macroeconomics, Pearson.