Lawrence Summers’sweeping allegations and ill willed prophecy about India’s demonetization -A rebuttal

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, 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.

Ill-willed prophecy?

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?

Also read:

This article was first published here:


PM Modi converts war on black money into people’s movement

(Image source

On the night of Tuesday November 8, 2016 as the world was tuning into the early trends of the US Presidential elections, PM Modi opened a new front in his war against black money. Not just that, he has done the unthinkable. He has managed to convert a government’s war into a people’s movement.

Modi has been saying again and again that his government will do everything that is necessary to remove the curse that is black money and to help every Indian in coming out of poverty and improving their life. Whether it was during his 2014 election campaign or later, he vowed to bring black money into main stream economy and make its perpetrators pay for their crimes. Whether while forming SC mandated SIT or during Income Declaration Scheme 2016, he repeated his intent. But, Indians in general and his opposition in particular didn’t pay much attention to what their Prime Minister was saying.

Everyone has been jolted out of his or her ‘business as usual’ or ‘things won’t change much’ state. Mamata Banerjee, Arvind Kejriwal, Mulayam Singh Yadav, Mayawati, and Lalu Prasad Yadav are clearly unhappy and are now contemplating ‘unity to counter the demonetization’. A large number of Indians are inconvenienced -such a major surgery on political economy would inflict some unavoidable pain – but almost every Indian is united in their conviction that PM Modi will deliver on his promises.

Overnight, Government’s war on black money became a people’s movement. Bank employees are going beyond call of their duty, restaurants and dhabas are offering free meals to those stranded without cash. From college students to housewives to daily wage earners to retired senior citizens almost everyone is going about their lives with stoic grace.

Some college students told me, ‘This (scrapping 500 and 100 notes) is good.  We will live in a better India’. A man at Chai tapri said ‘people making fun of Modi’s foreign travel don’t know what he is doing’.

The quips and jokes circulating on Whatsapp also reveal what is on people’s minds. ‘A well known politician has so many scrapped notes that he will manage to earn crores by selling them as kabadi ( trash). He was checking out kabadi rates on Tuesday night !’  Another person requested his contacts ‘Please don’t palm off old notes to your subjiwali etc. They may not have bank accounts to exchange notes and will face difficulties.’  Another quip, ‘I never knew a PM has so many powers’ -mockingly attributed to a former PM.

Indians are forming lines in front of ATMs and dispersing with disappointment, but with determination to behave well, when cash gets over.

As it would happen, there have been a few unfortunate instances. A few hospitals and doctors refuse to accept cheques. This too is understandable. There have been some unfortunate deaths in the aftermath of the currency shortage.  Hopefully, there will be mitigation of handling emergencies and starvation. For example, Maharashtra Government has ordered private hospitals to accept cheques (Read )

People also express concern that some businessmen and accountants might subvert the demonetization by laundering old notes via gold trading or payments in cash to low earning individuals. They are also apprehensive that wily politicians and businessmen will be back to their old games.

The demonetization project is still work in progress. It has earned praise from economists and global media. But much needs to be done. And much will be done.

PM Modi tapped into people’s frustration and anger about 60 years of Congress’ misrule that left India tottering on the brink of disaster. He didn’t stop after winning an election. Through his meticulously planned agenda he has increased his credibility. First proof of this came when lakhs and lakhs of Indians gave up LPG subsidy after his appeal. He helped people overcome their cynicism by optimism and willingness to do their part for their India.

Last Tuesday, PM Modi again staked his credibility to ask people for their cooperation in weeding out the menace of black money, corruption, and terror funding. He also has given some indication of his next step on benami properties.  Indians have responded magnificently to their Prime Minister’s call. A government project has become a people’s movement.

India’s economy and political economy are undergoing massive changes. Opposition parties are still grappling with them. These are big areas and are subjects for separate articles.

In world’s history there are very few parallels to the miraculous transformation of India that is underway.

Also read:


This article was first published at here:

Why are Interest rates not being cut despite of Consensus across the board?

This article written by me was first published by here

Raghuram Rajan has challenged his critics of high interest rates. He has asked them to prove that inflation has fallen. He has quoted consumer price index (CPI) data to argue his case. There are arguments about whether CPI should be used for setting interest rates or WPI (wholesale Price Index) should be used. Some economists will also show you that there wasn’t such high inflation in the first place. There are those from the government side who argue that lower interest rates are necessary for economic recovery. Industry associations too argue for lower interest rates.

Thus there is a consensus among mainstream economists, business press journalists, business lobbies, finance and commerce ministries of the government that interest rates must be brought down for economic growth.  This consensus has lived through UPA years and the present NDA years. Recent revelations by former RBI Governor Subba rao show that “Both Pranab Mukherjee, now the President, and P Chidambaram pressed for interest rate cuts to revive investments even though accelerating inflation called for the opposite.“(Read)

BJP leader and MP, Subramanian Swamy has said that Rajan is responsible for suppressing economic growth and hurting Indian businesses and job creation due to his insistence on high interest rates.

It seems that the RBI’s, irrespective who is at its helm, have been a lone discordant voice against a great and rare consensus for lowering interest rates.

Interest rates act asymmetrically on growth

High interest rates may impede growth but lower interest rates may not automatically spur growth. The developed world gives ample evidence of the latter. Even in India, rate reductions made no dent on growth. Whatever growth India has achieved has been due to Modi Government’s successful push for infrastructure, Make in India, Ease of Doing Business, and higher FDI etc. Direct Benefit Transfers and Mudra loans may also have contributed, but we have no data on this.

On the other hand, when interest rates are raised they have faster effect of slowing down.

Effects of interest rate raises and reductions on growth are not symmetrical.

Interest rates reflect efficiency of economy

Interest rates are more of an effect of certain things, rather than being merely a determinant of growth.  High interest rates are caused by friction or drag on movement of money. There are several sources of this friction.  At micro level, goods take much longer to travel in India than in the developed world because of conditions of roads and multiple check points for tax collection. At macro level, we know that our decision making processes are too long winded -whether it is the GST legislation or court cases it takes decades. Project approval and clearances take long.  All such things lock up human and financial capital. They impede flow of money and delay benefits. The result is higher interest rates unless money is printed.

Rewind to 1987. For purchasing an apartment, I obtained a housing loan at the interest rate of 14.5% for 20 year tenure. These days’ home loans are available for at sub 10% rates. This 4.5% or more reduction has taken place through various ‘tightening and easing’ cycles of interest rates for almost three decades. In my opinion, the main reason for this secular reduction in interest rates is economic liberalization forced on the Rao Government since 1991. It became progressively easier to build factories (though it is still difficult to shut them), receive and send Forex, buy cars and two wheelers of choice, get telephone connections, book travel tickets, send and receive payments, hold video conferences and do countless other things. Things have become faster, friction in the economy has gone down.

Black economy imposes costs

There is another big factor -the black economy. Estimates for the size of black economy vary but one can reasonably assume that its size is quite significant. The black economy creates friction because of conversion costs, delays, and Forex round tripping etc. Black money also leads to poor allocation of capital. Black money finances crime, drugs, and terror adding to enormous social costs -these effects are rarely estimated.

Inefficient banks

Our banks, particularly public sector banks, are inefficient, they need higher than normal interest rate margin to stay afloat.  Bad loans impose costs and huge friction on flow of money. (Read Will India’s Economic Juggernaut Stall? )

When above causes of friction are removed, economy will be more efficient and a stage for lowering interest rates will be set.

Is our inflation still high?

If you are a blue chip company you may ‘see’ a low inflation. Your raw material costs have dropped, you can raise foreign capital at low rates, but cost of Indian capital stays high for you.

If you are a common man, the answer is yes. Cost of food items keep increasing with some exceptions. In the last two or three years, cost of a cup of Chai at road side tapri is gone up by 50% and that of a hair cut in a modest saloon has gone up by 40%. Prices of rail, bus, and air tickets are increasing. Prices of all types of services are increasing. All this is happening despite a worldwide slump in commodity prices. There is no respite for common man. Rajan’s 5.6% CPI feels like much more like 10% on ground.

Lowering interest while retail inflation stays high is bad politics

If you are a business with proportionately large amount of capital locked you benefit from lower interest rates. But lowering interest rates may not revive your demand -as housing sector shows. Previous rate reductions had little impact in housing sales. If you are an exporter a lower Rupee on account of lower interest rates might help you -but as the last 18 months’ experience shows, this is far from certain.

If you are a common man, lower interest rates will reduce the interest you get on your savings. You will be particularly hit hard if you are a retired person living on interest on your savings or fixed annuity. You will be hit by lower income and higher expenses. This, in fact, may be happening now and may be cause of low demand.

Reducing interest rates when the real economy is not ready (means friction for transactions not lowered enough) will encourage inefficient businesses at the cost of efficient ones and at the cost of the hapless individual savers -not a wise thing to do. It is illogical to do it when our country is crying for capital (If not, why do we need FDI?).

Reducing interest rate when inflation on the street is still high, will be bad politics for Modi Government. A few jobs that will be created will not compensate for angering the fixed income or interest income classes. Moreover, artificially low interest rates won’t be sustainable. They will cause another cycle of poor growth. Modi Government won’t like this, since it aims to stay in power for two or more terms.

Economy is not growing fast enough because it isn’t ready

If the economy is not growing as fast as some people wish it to be growing, it is because of lack of demand as many have pointed out. Lower interest rates will not stoke consumer demand except in case durables like automobiles and housing (even this has not happened due to very imperfect housing market). It may benefit some businesses more than others through lower interest costs but it will not have much impact on bad loans.

The good thing is that India’s economy is becoming more efficient due to Modi Government’s many initiatives mentioned above.  GST, better highways, dedicated freight corridors, more efficient Railways, better air connectivity, rollout of nation-wide broadband, building agricultural supply chains, and better availability of electricity will reduce the friction to transactions considerably. Technology based smart tax administration, stringent laws related to black money, and national electronic payment systems will bring more transactions in the main economy.

What needs much more attention by Modi Government is improving housing sector by bringing transparency and speed in land and building related records, buy and sell transactions, and approvals. Realty market needs to be brought on the level of stock markets. That’s a long way to go. Same thing needs to be done in agriculture market.

An alternate view

The economy is being readied.  As this happens, the cost of money will come down, ground level inflation will come down and the conditions for lowering interest rates will be there. Institutions like RBI should develop better tools to gauge this and start lowering rates then.

The RBI Governor is hinting at some of these things but he is not telling it to us properly. It will be far better if our Finance Minister educates us in this way.  He should also influence RBI and other institutions to develop better leading indicators and tools for understanding changes in economy instead relying on CPI or WPI kind of crude methods. He should hold RBI more accountable for its job of supervising banks. But he should avoid pressurizing the RBI Governor on interest rates.This will be good politics too. 

PM Modi’s game plan

PM Modi

PM Modi

There is no doubt that PM Modi has captured imagination of Indians and the global citizens alike. His sworn critics can’t go to bed without having done their daily constitutional of ‘Hate Modi’ activities. His approval ratings continue to be very high despite their campaign.  However, what we read in media confuses us. Therefore, I decided to take a good look at what is happening and what we can expect from Modi Sarkar.

Before I start, I set down my expectations of directional shifts from Modi Sarkar:

My expectations of directional shifts by 2019

  1. Major increase in jobs or livelihood earning opportunities
  2. Country’s external and internal security on a very strong footing
  3. Rule of law felt by all. The mighty should be scared of taking law in their hands and the ordinary people should feel reassured by law
  4. Overhaul of agriculture sector for benefit of 50% of population and for reducing urbanization pressure
  5. Major improvements in mass transportation -intracity and intercity
  6. Cleaner air, water and a better ecological balance
  7. Right to information to be expanded to include right to fair and accurate coverage of news by media
  8. Congress Mukta Bharat: Elimination of Congress Culture** (divisive culture)

It is easier to read and print this  long form article as pdf  file than from a blog format. The full article ‘PM Modi’s game plan’ can be downloaded here:  pm-modis-game-planver1.pdf    (3786 words) Here is what you can expect.

Contents of the full article:

Signs of good progress and paradigm shifts

Things which haven’t progressed well

Likely scenario of 2019

What might be PM Modi’s game plan?

Hemant Karandikar

About the author:

Hemant is an IIT Bombay Alumnus. He is Leadership Coach, Strategy, UI\UX Design Consultant. Hemant is interested in economy, politics, culture, & technology. He has written ‘Lead to Regenerate’ – program book for learning regenerative leadership. He writes on these subjects on his blogs and  He is a long distance runner. Follow him on twitter