THIRUVANANTHAPURAM: Chief Minister Pinarayi Vijayan's chief economic advisor Gita Gopinath said demonetisation was “by far Modi's boldest policy intervention” but her enthusiasm has been dimmed by the shady way in which it is being implemented. Ms Gopinath said Prime Minister's “shock and awe” declaration was initially welcomed by the salaried-class and the poor.
“But with each passing day, that initial cheer diminishes. Public frustration is now mounting, because the government has failed to meet the demand for new printed notes,” she wrote in her column in Project Syndicate. “Commerce in India relies heavily on cash transactions, and informal-economy and small-business operations have now ground to a halt,” she added. Ms Gopinath, however, refused to buy the anti-Modi argument that demonetisation would not deter criminal activity.
“While tax evaders also store their wealth in non-monetary forms, such as land, art, and jewellery, cash remains a leading vehicle for ill-gotten gains, owing to its inherent liquidity. In other words, questions posed by Modi’s critics about the role of cash in feeding stockpiles of black money are misplaced,” she said. Taking out large-denomination notes, she argued, was more likely to improve tax compliance and reduce corruption. But she said the introduction of the Rs 2000 note would undermine the move’s long-term effectiveness.
Even while lauding the economic principles that motivated the move, Ms Gopinath said the near-term impact will be that of an “anti-stimulus”. “The consequent drag on demand will be significant,” she said. Given the costs, she recommended a gradualist approach. This approach, championed by economist and chess grandmaster Kenneth Rogoff, will be implemented over many years, and will permanently eliminate high-denomination notes. “It is practical, minimizes the collateral damage and ensures financial services and financial literacy to larger parts of India,” Ms Gopinath said.