Context
In the present article, author has tried to prove his contention that demonetization move by the government was a completely political move with no economic rationale. Read on to find out how he does that.
Three reasons for demonetization
Author states that economic theory and historical precedents provide us with 3 reasons for which demonetization can be done
- Hyperinflation: A period of rapid inflation usually caused by rapid increase in money. People do not want to hold on to money because its value changes by the minute. For eg: If eggs cost 10rs now, they might cost 100rs a minute or hour later. The value of money has degraded and it continues to do so. Hence, people no longer want to keep cash with them. Monetary system as a whole begins to collapse and under such circumstances demonetization can be a legitimate move
Read More: Hyperinflation has been explained quite beautifully here
- Counterfeit currency: If most part of the currency in circulation is counterfeit it makes sense to demonetise. It restores integrity to the monetary system
- Attacking organised crime: Rarely used in routine transactions of citizenry, high-value notes primarily help the operations of smugglers and criminals. As an attack on organised crime, such high-denomination notes can be decommissioned without hurting law-abiding citizens.
Author’s contention
None of the above conditions prevailed in India on November 8.
- Low inflation rate: India’s inflation rate is low
- Low size of counterfeit currency: The estimated size of counterfeit currency is small
- Large-value notes issued again: The crime-fighting purpose of large-value notes was undermined by the issuance of new Rs 2,000 notes
Moreover, if only an estimated 6-8 per cent of the black economy was in cash, it is unclear how an overnight decommissioning of high-value notes meaningfully attacked the problem of corruption.
Rest of the article presents the economic views and political motivations of our PM that might have been the reason for demonetization as per the author.
Not relevant as per exam but can be given a light read
