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

Ram Nath Kovind to be India’s next president

 India’s 14th president is going to be former Bihar governor Ram Nath Kovind, a dalit. He triumphed over former Lok Sabha speaker Meira Kumar in the vote count that took place on Thursday.   Kovind succeeds Pranab Mukherjee, who demits office on July 25. He becomes the

At JNU, all that is beautiful and “solid has melted into the air”…

Dear “Professor” Vice Chancellor,    When the clamour is made all around us, and rightly so, about the condition of growing degeneration of quality education in the higher institutions of learning in our country, you have justly – for which you must be

Making words count

In 2016, 38 bills were enacted in parliament. During that year, on average, the time spent on legislative debate (without interruptions) was 23 percent in the Lok Sabha and 16 percent in the Rajya Sabha (calculated from the PRS Legislative Research data).  Time is, however, just one measure

Business goes north

Tyre manufacturer MRF (originally Madras Rubber Factory), which enjoys instant brand recall thanks to the presence of its logo on cricket superstar Virat Kohli’s bat, figures among the most prominent industries in Tamil Nadu. But the state does not figure in its future plans. Like another TN industry

Do you think the Central Water Commission needs to take on the responsibility of irrigation governance?

Do you think the Central Water Commission needs to take on the responsibility of irrigation governance?

Debating the idea of privacy

Is right to privacy a fundamental right? The Supreme Court on Wednesday heard arguments on the contentious issue linked to the Aadhaar debate. Here`s how the issue has been addressed by different countries, with the first reference dating to 1890.   The Supreme Court on Tuesday s





Video

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter