Demonetisation: Kaushik Basu wants move rolled back, at least partially

Says govt could declare that Rs 500 notes, which many poor people frequently use, are legal tender again

Former chief economic adviser Kaushik Basu said the government should revoke its decision to demonetise, at least partially, by allowing old Rs 500 notes to be traded as legal tender. Otherwise, he said, GDP growth would drop, hurting the common man more than black money holders. 

“Demonetisation may have been well-intentioned, but it was a major mistake. The government should reverse it. It could at least declare that Rs 500 notes, which many poorer people frequently use, are legal again,” Basu, who till recently was World Bank vice-president, wrote in an opinion piece in The New York Times. 

Basu said the GDP growth would plummet due to demonetisation but did not specify any figure. In the article titled In India, Black Money Makes for Bad Policy, Basu countered the argument that demonetisation would bring down inflation. 

“There also is no evidence that black money actually is more inflationary than white money; nor in theory should it be. Black money is just money held by people instead of the government. It’s an excessive money supply that tends to create inflation; whether that money is white or black makes little difference,” he said. 

Terming demonetisation as a ‘ham-fisted’ move, Basu said the measure will put only a temporary dent in corruption. “Many Indians have been scrambling to change their old notes, causing snaking queues in front of banks and desperation among the poor, many of whom have no bank account and live from cash earnings,” he wrote.

He said the requirement that people must disclose the source of deposits higher than Rs 2.5 lakh being made in old notes, has already spawned a new black market to service those wishing to offload. Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. 

“Demonetisation is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewellery and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach, as savings for the children or the household,” he noted. 

Small hoarders often fear being questioned about the source of their money — they are accustomed to being harassed by tax collectors, among others — and may choose instead to forgo some of their savings, he added.