ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

DemonetisationSubscribe to Demonetisation

How Demonetisation Affected Informal Labour

​ The impact of demonetisation on the informal economy in India went far beyond cash shortages. This article examines the informal waste chains in the Pune Metropolitan Region, and outlines the tussles that emerged between informal labour and informal capital in the days following demonetisation. The resulting loss of trust in transactions continued to linger long after the cash shortages had eased. It diverted some of the backlash of the informal, urban poor from the government towards the more immediate nemesis—informal capital—which saw an opportunity of accumulation in the mayhem of demonetisation

The Story of Currency in Circulation

The impact of demonetisation on the movement of currency in circulation in India over time is examined. Four different models of currency in circulation are used to estimate these models using weekly data from April 1992 to October 2016. An analysis of out-of-sample forecast performance of these models prior to demonetisation reveals that the series could be forecast well before this event. Out-of-sample forecast errors of these models during the post-demonetisation period are, therefore, interpreted as shocks due to demonetisation. As far as weekly growth rates of the series are concerned, we observe no major change in intra-month seasonality in currency in circulation once the shock due to demonetisation mitigated.

Some Analytics of Demonetisation

Given the difficulty of a reasonably rigorous assessment of the long-term effects of demonetisation, its macroeconomic consequences in the short run are analysed. Standard macroeconomic tools are moulded for this purpose. It is found that there is a fall in demand as well as in supply-constrained output.

Erroneous Understanding of Macroeconomic Challenges

The government chose not to adequately expand budgetary expenditure to stimulate aggregate demand due to an erroneous understanding of India’s macroeconomic challenges. It relies heavily on imagined fiscal gains from demonetisation and the introduction of the Goods and Services Tax regime. The Union Budget 2017–18 was a missed opportunity for the government and our economy.

An Examination of Revenue Generation

The revenue side of the budget is scrutinised to understand if the government is being realistic about revenue generation in 2017–18. Clearly, there is over-optimism, given that economic growth will be slow. Too much is expected from voluntary disclosure and penalties, while incentives are not in place. It would make sense to allow some slippage in the deficit targets in order to revive the economy. In addition, the increasing problem of cesses is discussed with reference to the Krishi Kalyan Cess to assess whether cesses serve the purpose for which they are introduced.

Demonetisation through Segmented Markets: Some Theoretical Perspectives

The decision to demonetise 86% of India’s currency has been widely and substantially debated by notable scholars of political science and economics. This article wishes to add to that debate, by focusing on macroeconomic theory and how the policy decision affects the organised and unorganised sectors of the Indian economy­—provided certain assumptions remain in place. The following analysis is based on the money-multiplier theory and the segmented markets model of economic and monetary policy analysis.

Big Data, Bigger Lies

The claim that the government will use big data analytics to trace those who illegitimately deposited old currency notes, is just another instance of using lies to score political points. Notwithstanding this hollow posturing, the way this government is talking about the power of big data and its uses, only confirms the worst fears of the misuse of Aadhaar and other public data entrusted to the state.

India’s Marie Antoinette Moment

Narendra Modi’s promotion of a “cashless society” shows the government’s disconnect from ground realities, and harks back to Marie Antoinette’s famous “let them eat cake” response to learning that peasants had no bread to eat. Clearly, a cashless or less-cash economy will not be achievable in the near future, and may also not be desirable.

Post-truth India

The Prime Minister’s year-end speech was a classic case of demagoguery.

Economic Rationale of ‘Demonetisation’

The government’s claims about the fruits of “demonetisation” of ₹500 and ₹1,000 notes are analysed. The five claims—fighting terrorism, “black money,” gaining fiscal space, reducing interest rates, formalising informal economy—are scrutinised from an economics perspective.

Theoretical Analysis of ‘Demonetisation’

With the aid of simple theoretical tools used in classroom lectures, the implications of the recent “demonetisation” exercise in India are analysed. It lends support to conclusions reached by other authors on the impact of demonetisation with the aid of available data. Following Robert Lucas’s Nobel lecture, the merits of economic policies that assume the form of random shocks to an economic system are questioned.

Money and ‘Demonetisation’

Like in the rest of contemporary capitalism, the Indian monetary system is based on state-backed credit money. Yet this hierarchical system of credit/social relations appears to us as a system of fiat money. This fetish of fiat money, analogous to Marx’s commodity fetish, is produced in the operation of credit system. The institutional and political arrangements of the Indian state amplify this inherent fetish. This conjuncture of elements produces a particularly robust fetish of fiat money in India, giving the Indian state more degrees of freedom over money than other states enjoy, a margin that the current government is now exploiting.

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