The article Most sweeping change in currency policy in the world in decades coauthored by Natasha Sarin and Lawrence Summers makes sweeping statements of India’s demonetization unhindered by facts.
While PM Modi’s Big Bang demonetization has gone down well with a large majority of ordinary Indians despite inconveniences and difficulties, the global media’s coverage has been heavily biased. This is not surprising given the vested interests that control media empires.
But one expects economists to give well reasoned assessments.
Lawrence Summers is no ordinary economist. Among other things, Summers was the Chief Economist of the World Bank, Undersecretary for International Affairs of US Department of Treasury under Clinton Administration, and Director of National Economic Council a forum used by US President. He is the one who had recommended abolition of US $100 and Euro 500 notes. “One of us (Larry) has long advocated the abolition of the $100 note in the US context and the 500 euro note (aka the Bin Laden) in the European context”
Since Summers is undoubtedly the far more accomplished of the two coauthors and since article is published on his website larrysummers.com, we can assume that he fully stands by the article.
Bye bye, facts
The economist duo ‘recognizes’ that ‘many who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways’. Do those who hold cash in large quantities in the US or Europe have come to be wealthy in legal ways? But that’s another subject. The duo criticizes that what was legal tender was suddenly no longer legal. It doesn’t see that secrecy and suddenness of demonetization is a must to ferret out black money in cash form. In India, even critics (most of them) of demonetization agree that the suddenness and secrecy are critical success factors and they focus on execution issues.
Nor does the duo take into account the fact that India has been facing terror attacks from Pakistan which are funded by fake Indian currency -almost all of it in denominations of Rs 500 and Rs 1000.
The duo questions ‘equity and efficacy’ of India’s demonetization.
As far as efficacy is concerned, we have already seen that Pakistan paid stone pelting in Kashmir has stopped. Concerning black money in other forms, PM Modi has already announced that demonetization is just the beginning and that more actions like crackdown on benami holdings will come soon.
Equally importantly, India has near universal banking and it is rapidly digitizing. A nation-wide GST is another way of bringing large number transactions out of the black economy. The united payment interface (UPI) that makes person to person e-payments possible has been launched. The duo fails to factor in all these fundamental changes.
The economist duo also doesn’t recognize that even if majority of illegal wealth is in non-cash form, cash (means Rs 500 and Rs 1000 notes in India) is vital for the black economy to function.
We shall deal with ‘equity’ in a while.
Summers and his coauthor make sweeping and baseless allegation against Modi government
The duo says about Modi Government ‘ the temptation to expropriate is understandable’. In effect, Summers and his colleague are accusing the government of giving in to the temptation of taking over someone’s property. This is a serious accusation and is completely baseless because any Indian citizen can deposit his old and useless notes in his or her bank account and get them credited without any limit. It remains citizen’s property. If questioned by Income Tax or other tax officers, citizens have to show that the amount is consistent with declared earnings and economic activity. Is the economist duo suggesting that things ought to work differently? Do the Income Tax people in US or Europe behave differently? So, how is this expropriation? Summers and his colleague are wildly off the mark here.
Making legal ambiguity as a defense of the corrupt
The duo says ‘ Most free societies would rather let several criminals go free than convict an innocent man’ and the goes on to ‘ Moreover, the definition of what is illegal or corrupt is open to debate given commercial practices that have prevailed in India for a long time’. Now innocents aren’t getting convicted nor is there any ambiguity in India about what is illegal and corrupt. Perhaps these ‘defenses’ have worked well for bosses of western financial institutions who were caught in various frauds and yet had no personal culpability despite tax payers bailing out their institutions.
The economist duo may note that the Indian legal system was available even for Kasab, a Pakistani terrorist captured in terror attack of 26/11 to defend himself for years.
Now, about the ‘equity’
The Big Bang demonetization announced by PM Narendra Modi caught many in a bind. The black money hoarders got a black eye. Parties like Congress, AAP, TMC, SP, BSP, RJD and yes, your neighborly Sena cousins got hit badly. Builders and Jewelers conducting illegal cash businesses got hit on head and saw stars. The stone pelters of Kashmir ended up jobless. The Naxalites got busy in scraping the bottom. The big bang detonated under seats power in Pakistan too.
Ordinary people complain about queues and inconvenience but they think it is a small price to pay to get rid of black money, mis-governance, and terror. Some cash dependent (black money) sectors like realty and jewelry have taken a hit. There may be a temporary slowdown. To more than balance the negative effect, if any, banks have received so much cash that they have started dropping lending rates. State Bank, India’s biggest lender is one of them. The fall in interest rates has taken place even though RBI hasn’t cut benchmark rates. Legitimate businesses will get boost. We aren’t even talking about the illegal cash that doesn’t come out in open is now trash and its power to vitiate economic and social fiber is now Zero. 82% Indians favored the decision and 84% said Modi government was serious about the issue‘ It is a people’s movement. That’s equity.
The duo then offers a prophecy -‘ the ongoing chaos in India and the resulting loss of trust in government fortify us in this judgment’ -as a justification for its ‘judgment’!
There are baseless allegations against Modi government, legal ambiguity as defense of the corrupt, and an uncalled for (ill willed?) prophecy in Summers’ and his coauthor’s article.
Neither economics, nor logic
The quality of Summers’ and his coauthor’s article reminds one of Arvind Kejriwal’s allegation ‘ The government expects to net 10-11 lakh crore rupees by asking people to surrender the spiked currency and write off the bad debts’ (read ) You can’t write off bank loans (assets) by using peoples’ deposits (liabilities) .
Do you find economics or logic anywhere?
This article was first published here: https://www.myind.net/ground-reports-about-indias-demonetization-suggest-it-success-rebuttal-lawrence-summers#.dpuf