India scraps its two largest rupee notes in shocking anti-corruption move

As we had often come back to discussing economic benefits/impact of sports I thought it was about time for an economic discussion forum.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan »

What is your opinion Jay about DeMon after two years? Has it been a success as PM and FM and other ruling party leaders have been claiming. Or an utter failure as many economists, Indian and foreign, have claimed? Did it benefit any section of the Indian people? Do you think black money has been eliminated or reduced? Is the Indian economy flush with funds? Or are banks ready to fold up because of NPAs? As I keep claiming, I have very little idea about economics. Would be happy to hear your views as well as that of many others here.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris »

I also don't know any economics, Mugu. My general take is that we probably did not have as much black money stashed away in India in big notes, like everybody (including apparently Modi) thought we had. Nowhere even close. That being the case, this was an exercise in futility. It did not cause catastrophe like many economists predicted, and I have seen quite a few people still saying that the long-term effects in taxation etc are actually positive. Bottom line - I wouldn't have done it, unless I had solid intelligence on black money stacks. If Modi did it without such intelligence info, he made a big mistake. But people trusted his good intentions enough, to suffer all the hardship without rioting on the streets. Or it could have been even worse.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by suresh »

Sorry Jay. It is a hypothetical scenario for you. Not for me and others who live in India. It was not fun to not have money to buy coffee for several weeks in a row. I didn't have the time to stand in a queue for several hours to change old notes to new ones with the rules changing by the day. It was much harder for people who live day to day and earn less than 5-10K a month. The grocery store owner on campus went from employing two people to running the shop on his own during the last couple of year. Demonetisation and GST acted like a combination punch on his business and I suspect for other small businesses. For a while, I thought that he'd shut down his business. It appears that he has survived it. Needless to say, all I am only giving is anecdotal evidence. Attributing good intentions to the government will not do. This government seems to think that accountancy and economics are the same thing. Imagine appointing a CA to the RBI board.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris »

suresh wrote: Wed Jan 02, 2019 11:48 pmSorry Jay. It is a hypothetical scenario for you. Not for me and others who live in India. It was not fun to not have money to buy coffee for several weeks in a row. I didn't have the time to stand in a queue for several hours to change old notes to new ones with the rules changing by the day.
I was agreeing with your view, Suresh. There is hardly anything we gained from that demonetization so far, except perhaps some long term good effects that some economists still say will be there (I don't know). As I said, I wouldn't have done it, based on what now seems to be clearly poor info on the amount and nature of Indian black money that Modi used to take that massively risky step.... And I was in India when he announced it, and was there for a few days after, so I saw first hand how it was initially. Not some of the later hardships like you saw.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 »

The bigger issue with the right-wingers is to think that expertise is useless. While some new blood and ideas are good, and shaking up things are good once in a while where technocrats run the show, there is some value to having experts to do the job. We would not trust an accountant to design a space ship. Why do we think running a complex system such as the RBI and designing interventions and improvements in a complex system as the economy can be done by outsiders? Or for that matter running the Education department (HD ?). I see this in Trump and Modi. Don't know about the others (Bolsonaro, Orban, etc.). I think Macri may be more sensible. I suppose maybe even left-wingers do this. But, with the limited capacity of my brain, I can only remember these.

Of course, I know people like Bhagwati, etc. supported the demon initially. But, in case of economics, as with some other sciences, maybe the consensus matters. Also maybe looking at history and seeing that it has not really done much anywhere else.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan »

Yes Jay, I also recently heard some economist (forget who) being quoted to say, in the longer run it would do good. But in the shorter and even longer run (as Suresh put it), people have suffered. Small business has suffered irreparably, farmers have suffered (according to reports) terribly, unemployment has increased manifold, they are talking of massive shortfalls in GST (according to reports), and just today saw a report that new foreign direct investments had fallen to a 14-year low. I don't know the implications of all these in the longer run but I do realize that it would hit the Indian economy hard. Yes, as Prasen noted , Bhagawati initially supported DeMon (perhaps only the lone leading economist to do so) but nothing much has been heard of him since. Standing in queue and losing tax-paid money etc were irritants and frustrating all right for a retired person, but the more I read reports about how small business had closed down or was on the verge of collapse, how labour migrated back to their home in Bihar, Jharkhand and Bengal and never regained their jobs, how migrant labour managed without salaries for a few months in a state like Kerala since the contractor was unable to pay (guys who worked in my own place on a repair job), I realized I suffered nothing compared to these people.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris »

prasen9 wrote: Thu Jan 03, 2019 3:30 amOf course, I know people like Bhagwati, etc. supported the demon initially. But, in case of economics, as with some other sciences, maybe the consensus matters. Also maybe looking at history and seeing that it has not really done much anywhere else.
Most economists who opposed it were doing it only on the basis of your last statement, but I discounted some of their opinions, because that reasoning is flawed in this case. Modi tried demonetization at a scale that I don't think had ever been tried anywhere else. Removing some 85% of the currency in circulation in a country of India's magnitude was unprecedented. Nobody ever had the guts (or foolishness) to try it. How abruptly we did it, was also quite different than how it had been done before. Had the economists given a proper argument on WHY this specific way of doing it wouldn't work, rather than say that the lesser-scope attempts had not worked around the world, I would have even agreed with them. But almost no economist was making any case with logical arguments on why it would not work. They also had only anecdotal stories that everybody must have taken the black money outside the country already, or that they must have converted it to gold already etc. On whose data? None of them really gave data-based evidence from India for any of what they were saying. The "it never worked anywhere" line was not sufficient in this specifically different attempt at demonetization.

Maybe it was a case where we simply did not have the level of black money that everybody thought we had in India. I doubt if that is the case, because we all know how big a fraction of real-estate transactions black money was. More of a chance is that there was a mechanism for black-to-white conversion. We discussed it immediately here, but hardly any opposing economists mentioned it then as what would thwart the plan. None of them said that the black money people would find, quickly enough, sufficient number of middle-men (the proverbial cooks and drivers, in our discussions then) to convert black to white through bank deposits - which is most probably how a large fraction of money became white. That was Indian business ingenuity, as I called it then. Perhaps a social structure of near-feudal subservience of such middle-men was also a peculiar Indian factor that caused the operation to be much more prevalent/successful in India than it would've been in other countries. Again, data was scant, and one had to go on gut feelings on how much black-white conversion was possible in that manner. Modi underestimated it, if he was aware of it. The economists didn't talk about it, if they expected it. So I am not giving the opposing economists any credit on any of this. They were all giving bookish arguments based on what happened in Argentina or UK or wherever. None of such arguments were the reason why all money became white and got back into the system, thwarting Modi's expectations.

I don't think the economists and bureaucrats would have been able to give concrete arguments on why it wouldn't work, even if Modi had consulted them (but reportedly he consulted only very few people). He probably would have done what he did anyway. So, this was a case of Modi going with a gut feeling based on anecdotal evidence or folklore ideas, which could well have been correct for all we knew - but clearly got proven incorrect. A gamble he should not have taken, in retrospect. Too much was at stake for such a gamble based on gut feelings. But then again, a good number of people including economists thought that his gut feeling might be right too (perhaps 30-40% of people), even if they all feel differently now.

By the way, I had recently taken a look at whether any really comprehensive studies have been done in the last 2 years. I mean serious economics PhDs that focused on pattern recognition etc from data at a large scale from banks, to see the extent of black-white conversion that happened. I didn't find much. I am still looking for what happened to the commission money to middle-men that got into the economy, how much it must have been, and what effect it must have had later. Structural equations modeling, Bayesian schemes, etc, could reveal interesting info there. I didn't find much. Maybe I didn't look enough. But the economists seem to keep talking about the standard stuff based on macro indicators. Not much use for me. Consumption has increased in India recently. Tax receipts also increased. What long-term effects do these things have? I don't know. I am not an economist. Just a guy who, in general, don't trust economists one bit. I know them, and I have worked with them. The engineer makes models to approximate the real-world and feels bad at the inaccuracies, but the economists make inaccurate models and wait for the real-world to fit the model. So I don't respect them much. Rare exceptions exist, like PKB. But he was smart enough to not give much of an opinion on this demon mess all along - thus gaining more of my respect!!
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 »

Although a lot (maybe more than a majority) of work in economics is theoretical by nature devoid of any real-world data and assumptions that are too clean, there is substantial work in economics based on data (not on this topic though). I suppose the trick is to pick the right set of economists and the right set of economic theory papers. I think we should not throw away the baby with the bath water. For example, PKB and the economists largely supported TARP saying that the government would gain money in the end. I think it did and avoided a global disaster. The history in that case taught the economists what to expect that I as a lay person did not know whether to believe or not. So there are times when the economists know what they are talking about and times, when due to lack of data, they are guessing their best. Next time, I will not be so pissed with the government bailouts that will make us money. But, I would, of course, want the government to balance moral hazard with destruction to the economy in making decisions.

I agree that there was no data to show it would not work either because this was unprecedented. But, by that token, there was even less data to show that it would work either. So, we are choosing from extrapolation from small data versus random guessing. I guess we differ in the sense that I do not want to play havoc with a billion+ people's lives trying out some random experiment. I value stability and careful stewardship. If you are the type that wants to play the lottery and hope to come out with a winning hand, you would like this experiment.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris »

We have gone past 4 years since the demonetization. I guess it is somewhat universally accepted as a failure now, though some of us tried to find all kinds of justifications then and hoped for great results in the future. Maybe there is even some good outcomes from it, but probably not enough to justify the negatives.

Anyway, I found the small article below (trying to defend the Modi government) interesting... Not because of the article itself but all the comments below it. A lot of rather matured back and forth between people who seem to understand some economics. It all flies way over my head because I don't understand economics at all...

The train of structural reforms set in motion on Nov 8, 2016, has led to formalisation of economy

Again, read all the comments below... Interesting.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by PKBasu »

I know the author well, but I saw zero comments when I opened the article just now.

The main purpose of Demonetization was to eliminate (or at least sharply reduce) black money. (Formalization is another way of putting it..). It succeeded. Do any real estate transaction, and you will find that neither side is willing to use "black" (unaccounted for) money (in cash rather than by cheque) for most of the proceeds. In the past, half or more would be paid in "black" cash, now less than 10% will typically be (and that too, only for relatively small transactions).

Demonetization was part of a trifecta of reforms that strangled the black economy: VDIS (voluntary disclosure of income scheme) and the gazetting of the Benami Transactions Abolition Act (passed in 1988, but never gazetted and hence not made the law until Sep 2016) -- both in September 2016, followed by Demonetization in November 2016, and GST (which requires both sides of a transaction to be recorded) in July 2017. It is now extremely difficult to evade paying taxes, and the tax base has consequently widened significantly.

The challenge now, however, is to get banks to start lending again. (India's bank credit is up just 5.1% YoY at the end of October, woefully slow). And for local corporates to start investing in creating new capacity -- possible only if India is ring-fenced from the massive global over-capacity created by China in every important industrial sector.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris »

The comments (81 of them) are still there at the bottom of the article, PKB... A blue link should be there at the bottom to open it?... May need to wait a little for your browser to show it. AK Pattabiraman and a few others who seem to know economics have commented.

Your comments on formalization are what I actually had felt in my mind. The idea that black money would go out of things like real-estate sales. Also felt that the tax base would widen. I guess the question is about how all that would affect the economy. I had assumed (with my simplistic thinking on economics) that it was a good thing and that after a period of negative effects, it could only help in the long run. The problem was that I don't know if it was wrong thinking or that we just had to wait even longer than 3 years (or two considering the timing of GST that followed). And then in the 4th year we had Covid mess everything up. So now I don't know anything at all about something, of which I never knew much, to start with :)
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 »

Jay, will you delete the first part of PKB's second message? Or the first message totally? [Done, Mod Jay]

If indeed it makes a big change wrt black money, it should be measurable on a macro scale. We should see some form of jump which is "abnormal" or a significant increase in the slope of some metric.

When people say Modi this and that or Trump this and that, I look at the curves and if I do not see a distinct difference, then the event being hyped is possibly hype. And, yes, the effects may be delayed. But, we should be able to see the outcome. Don't see much. The Trump economy is a smooth continuation of the Obama economy albeit at a slightly slowed down pace (wrt say jobs created). And, looking at growth, human development index, etc., I cannot see a Modi miracle. It's all tweedle dee and tweedle dum.
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RBI withdraws Rs 2000 note from circulation

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