THe Blog

November 15, 2016

Demonetisation: Fact and Fiction

Vivek Dehejia, Resident Senior Fellow at IDFC Institute deconstructs the debate on government's demonetisation move by separating facts from fiction. 


"First, given that the old 500 and 1,000 rupee notes are being replaced with new 500 and 2,000 rupee notes, what is involved is, in effect, a one time wealth tax on black money...Black money will take a hit, at least for a while, and that cannot be a bad development.


Second, the costs of demonetization are the short run adjustment costs caused by a liquidity crunch during the transition period in which old notes are swapped for new notes...


Third, armchair analysts of the short run impacts of demonetization have in some cases succumbed to a very basic confusion, that between a one time change in the price level and the rate of price inflation...


Fourth, the beneficial effects of demonetization in the longer run are likely to be an increase in financial inclusion, as more of the unbanked are goaded to enter the financial system, and this can only be a good thing...


Fifth, and last, a long run solution to the problem of black money must tackle it at its source..."


Read the complete blog here.


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