![]() ![]() The upshot is an across the board deterioration in major macroeconomic aggregates like consumption, production, employment, GDP growth and tax revenue, at least in the short-run. Micro, small and medium enterprises which operate on cash will, in all likelihood, see their businesses slow down or even come to a grinding halt. ![]() Farmers are likely to face difficulties in selling freshly harvested crops. At a sectoral level, cash-intensive industries like real estate, construction, transportation, gold and jewellery will no doubt feel the pinch of lower consumption demand. Setting aside the implementation factor, where does this monetary shock leave an Indian economy characterised by one of the largest share of cash relative to GDP in the world? For starters, the common man, enduring extreme hardship from a shortage of liquidity, will almost certainly put off purchases that are not absolutely essential. Therein lies the utility of a note new to the financial system, which allows authorities to differentiate between wealth that has gone through the demonetisation-filter and that which has not. Tax-evaders would have split up their loot into smaller transactions which are harder to trace or they could have divided their pile of cash among several accomplices to buy other assets.Īnother lingering confusion is why the government issued an even higher-value note (2000-rupee) to replace the existing ones, which will undoubtedly render basic transactions ever more excruciating? One argument could be that a tax-evader may try to circumvent the process by whitening only part of his black wealth paying the enforced tax and a penalty, withdraw it from the bank and then return later on to deposit the rest (or part of the rest) of his old black money while claiming that he is depositing the same legalised money he withdrew earlier. The alternative, a gradual time-bound plan that tracked large transactions, would have had obvious loopholes. To be fair, the government's rationale that the suddenness was designed to prevent existing hoarders from converting their ill-gotten gains has merit. Surely the honest citizen, elderly and housewives who live hand to mouth do not deserve to suffer stuck in endless queues in front of banks or ATMs to exchange their notes? Consistent with Professor Rogoff's argument that a big-bang approach is severely disruptive to the economy, detractors of Modi's demonetisation drive raise concerns over the collateral damage caused by an overnight shock.
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