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

Making sense of the ‘crisis of political representation’

Imprints of the Populist Time By Ranabir Samaddar Orient BlackSwan, 352 pages, Rs. 1105 The crisis of liberal democracy in the neoliberal world—marked by massive l

Budget: Highlights

Union minister of finance and corporate affairs Nirmala Sitharaman presented the Union Budget 2023-24 in Parliament on Wednesday. The highlights of the Budget are as follows: PART A     Per capita income has more than doubled to Rs 1.97 lakh in around

Budget presents vision for Amrit Kaal: A blueprint for empowered, inclusive economy

Union Budget 2023-24, presented by finance minister Nirmala Sitharaman in the Parliament on Wednesday, outlined the vision of Amrit Kaal which shall reflect an empowered and inclusive economy.  “We envision a prosperous and inclusive India, in which the fruits of development reach all regions an

Soumya Swaminathan to head M S Swaminathan Research Foundation

Former World Health Organisation (WHO) chief scientist Soumya Swaminathan takes charge as chairperson of M S Swaminathan Research Foundation (MSSRF) from February 1.   Founded by her father, the legendary agricultural scientist M S Swaminathan, MSSRF was set up to accelerate the use of m

m-Governance: Key to Digital India

The digital revolution is being led by India. Digital governance is a key component of the government's ambition to transform India into a society where everyone has access to the internet. It includes both M-governance and E-governance, which are major methods for the delivery of services via mobile devic

A sacred offering of the beauty of ‘Saundarya Lahari’ – in English

Saundarya Lahari: Wave of Beauty Translated from the Sanskrit by Mani Rao HarperCollins, 218 pages, Rs 399 ‘Saundarya Lahari’, usually ascribed to Adi Shankaracharya, has a unique status among the religious-spiritual works of Hinduism.

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now



Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter