Saturday, 22 April 2017

YV Reddy's analysis of demonetization impacts

The School of Economics, University of Hyderabad (UoH) organized a lecture ‘Indian Economy: New Challenges and Opportunities’ by Dr. YV Reddy, former RBI Governor on April 21, 2017. 
  • Demonetization as an unprecedented move by the government and the enforcement of stringent punishments will not decrease the flow of black money in the market. 
  • A billion people have been put to inconvenience for over nearly two months for no fault of their’s. It never happened in any country. Despite the collateral damage to innocent people of that magnitude, the public kept quite. That means people were disgusted with the system
  • The unintended and incidental consequence of the demonetization drive is the new-age digital economy of the country. 
  • The note-ban has helped a quantum jump in digitization and the follow-up provisions in the Budget have strengthened the regulatory powers of tax administration. There was strong and massive support from the public for reforms that address systemic problems that were once considered intractable.
  • There are downsides to digitisation, which demands higher degree of vigilance, they do not deter its benign impact on modernization of the economy mainly by formalizing semi-informal sector and reducing transaction cost.
  • Short-term economic impact of demonetization has been negligible so far. 
  • It’s direct and immediate impact on black money and corruption is similarly negligible. 
  • It is not a mere shock akin to a truckers’ strike but has systemic implications for the future.
  • Stringent laws are the most violated in our economy. 
  • A public policy can be effective only if the governance is effective. 
  • Punishments are not an analytical solution to black money. It can only appeal to the masses.
  • The inter-relationship between market and the government and the dynamics involved in it should be considered.
  • Goods and Services Tax (GST) needs a huge administrative, technological and logistical base, and its implementation would cause a short term inconvenience for the Indian economy.
  • When something good happens, advanced states grow rapidly. Thus, there is an unequal growth among states. Consequentially, compensation from the government to bridge this gap diminishes the scope for improvement. If both Centre and State fight for an equal headroom in regard to GST, the tax rates can go upto 40% from 28%.
  • The lawless globalization of capital and the public sector banks getting involved in business creating the menace of Non-Performing Assets (NPAs) in Indian economy. 
  • Capital infusion of public sector banks should not be done by government alone as it may give windfall gains to private shareholders. Taxpayer's interests are thus involved in any recapitalization. 
  • Major private sector banks do not have problem of capital adequacy despite non-performing Assets.
Criminals are driven by the same desires as we are, 
but they take disastrous shortcuts and end up in a real mess ... Colin Wilson

My View:
There is no question that demonetization 2016 has left with 'All pain & No gain' situation with Modi’s reputation as a sound economic manager taking severe beating and resurrection of fears that the ruling BJP takes policy advice from quacks. Modi's dreams to modernize India by 2019 has been shattered. Now he has to resort to age old political gimmicks of fake narratives rather than truths. This lousy technique will give some benefits up to an year and when economy goes out of control sooner or later, he will be the casualty where as the price will be paid the common man of India. In contrast, Congress with all its drawbacks, corruption & scams, always exhibited sanity of mind never to muddle with the livelihoods of poor & peasants and preserve institutional autonomies, where as this autocratic Modi dealt deadly blows to them in the name of demonetization with all faked objectives and autonomy of institutions destroyed.. In the process, rule of the law and institutional independence were severely compromised and at the same time giving rise to police raj with sweeping powers to tax men that is detrimental to democracy. 

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