Kaushik Basu Flays Demonetisation, Says it is Likely to Fail
Long queue outside an ATM in New Delhi post the demonetisation of Rs 500 and Rs 1000 currency notes.
Former chief economic adviser to the government Kaushik Basu has criticised the Centre’s demonetisation of Rs 500 and Rs 1000 currency notes, saying it was badly implemented and likely to fail.
Basu made the comments on Sunday in an article in the New York Times.
He is currently the C. Marks Professor of International Studies and Professor of Economics at Cornell University in the US. He served as chief economic adviser to the Indian government from 2009 to 12 and was chief economist of the World Bank from 2012 to 16.
“Demonetisation was ostensibly implemented to combat corruption, terrorism financing and inflation. But it was poorly designed, with scant attention paid to the laws of the market, and it is likely to fail. So far its effects have been disastrous for the middle and lower-middle classes, as well as the poor. And the worst may be yet to come,” Basu wrote.
He also criticised the poll conducted on Prime Minister Narendra Modi’s App. While he is supportive of the intent behind the policy, that of dealing with the large black money economy in India, he said the move was ‘ham-fisted’ that will put only a temporary dent in corruption and is likely to rock the entire economy.
He said that the policy was causing people to skimp on the daily expenditure which will cause prices to fall. But this is not good news as it will hurt farmers and small producers of goods. Further, he said this will have a cascading impact on India’s economic growth which is likely to nosedive.
While the move will bring some illicit cash into the light, this will bring only fleeting changes because the bulk of the black money economy is not cash, he said. According to Basu, it’s held in gold and silver, real estate and overseas bank accounts. Further, people will rebuild their black money stock piles in the new higher denomination notes.
He said that to deal with black economy, mere fiscal policy will not do. It will require institutional changes and mindsets will have to be changed.
“In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living,” Basu said.