Currency change: “Long-run gains depend on implementation”

Kenneth Rogoff, who outlined the idea of phasing out big currency, gives thumbs-up to Modi’s move but criticises implementation

GN Bureau | December 2, 2016


#Kenneth Rogoff   #Cash   #Currency   #Demonetisation   #Narendra Modi   #Economics  
Kenneth Rogoff
Kenneth Rogoff

Like many of us in India, Kenneth Rogoff, a Harvard professor and former chief economist at IMF, backs the logic behind India’s demonetisation and balks at its implementation.

Rogoff should be pleasantly surprised since the idea he floated in his book, The Curse of Cash (Harvard University Press), only in August this year has been implemented at a big scale in India.

“Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely,” He writes in a blog post.

In the book, Rogoff makes a case for pushing digital money since (in the case of the US) “the vast bulk of physical currency is held in the underground economy, fuelling tax evasion and crime of all sorts.” That is also the logic the government of India has given for its radical move of banning high-denomination currency notes.

But Rogoff is not so impressed when it comes to the way the decision has been put into practice. “On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges.”

A swift exchange instead of a gradual one would entail “significant problems”. “First, there are formidable logistical problems to doing anything quickly... Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime.”

Rogoff advocates a slow gradual currency as it would be “far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences” – precisely what Indians have been complaining about now.

Meanwhile, the economist also clarifies that his plan of eliminating large notes and not replacing them “is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion.”

Also, Rogoff is not sure why Rs 2,000 note is being introduced after phasing out Rs 1,000. “Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes.”

On the final outcome of Modi’s ambitious move, Rogoff is ambivalent: “Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.”

Also, “The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.”
 

Comments

 

Other News

On a personal note: DIVINE

An underground rapper who grew up on Mumbai streets, Divine spins his music around his environment and poverty. His breakout single, ‘Meri Gully Mein’, along with fellow rapper Naezy caught Bollywood’s attention. The Hindi film ‘Gully Boy’ is inspired by their lives and gr

The role model for an IAS officer

Anil Swarup, an IAS officer of Uttar Pradesh cadre who retired in 2018, is a model bureaucrat who retained his optimism right till the end of service and exemplified dedication and commitment. His excitement at the opportunities that a job in the IAS provided is evident on every page of his new book publis

Reform of the civil services: At home and away

The question of reform of the civil services has been debated extensively at all levels at least over the last five to six decades after independence. Indeed, it was soon perceived that the Indian Administrative Service (IAS) may not be well equipped to deal with the problems of an emerging developing coun

The greatest challenge for any government

Shouting vengeance at all and sundry while wriggling out of holes of our own making seems to be our very special national characteristic. Some recent instances are illustrative of this attribute. A number of business tycoons with thousands of crores of unresolved debts have fled abroad with the government

The mysterious case of CBI’s legality

The Central Bureau of Investigation (CBI) came into existence, based on a Resolution of the home ministry, dated April 1, 1963 – a sheer coincidence that it also happens to be April Fool’s day. Over the past few months, we have seen the CBI live up to its founding day with great zeal, being i

The Evolution of Modi

Gujarat was passing through a turbulent phase in the 1980s. The decade began middle class agitations against new reservation policies, and the caste friction turned communal under the watch of chief minister Madhavsinh Solanki, alienating majority of urban population on both counts. The ground was ripe for

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter