Re: The intellectual underpinnings of #DeMonetisation of 8 Nov 2016. A Tweet thread.
Was there a body of theoretical or logical intellectual economic thought that could have influenced #Indian Prime Minister Modi to spring the #wreckingball of #Demon on the Indian #Economy?
Was there a body of theoretical or logical intellectual economic thought that could have influenced #Indian Prime Minister Modi to spring the #wreckingball of #Demon on the Indian #Economy?
1. Nobel Laureate Kenneth Rogoff wrote a book 'The Curse of Cash' . He argued for the phased withdrawal of the USD 100 bill. His arguments were:
1. Hardly anyone in USA ever used or carried the 100 dollar note. Smaller transactions were paid, when they were paid with cash,
1. Hardly anyone in USA ever used or carried the 100 dollar note. Smaller transactions were paid, when they were paid with cash,
With USD 20s or 10s. Transactions of > 100 USD value were settled by cheque, plastic or bank transfers.
2. 40% of all USD 100s are held outside America.
3. The main sector where the 100 dollar bill was used regularly was the trade in guns, drugs and crime. All over the World.
2. 40% of all USD 100s are held outside America.
3. The main sector where the 100 dollar bill was used regularly was the trade in guns, drugs and crime. All over the World.
4. The 100 dollar bill served the role of a store of value for the World's criminal gangs (from Afghanistan to Colombia). This trade did nothing good for America but Uncle Sam was underwriting the costs of the means of settlement.
So what Rogoff proposed was an open, time-tabled, plan to withdraw the 100 dollar bill as legal tender. Over a 7- year period. No replacement bill. Everyone, US or non-US, could deposit their 100s in a bank for credit to their account. No questions.
The amount of credit would start at 100% of value to start with and then decline with each passing year. At year 7 the value would fall to 0. This was to encourage early rather than late surrender.
Brilliant, principled, well thought out and clearly planned. No sudden dislocation not even for the crooks.
The other great source of inspiration for #DeMonetisation was arthakranti.org. They were a bunch of Pune CAs and engineer types who argued as follows.
The other great source of inspiration for #DeMonetisation was arthakranti.org. They were a bunch of Pune CAs and engineer types who argued as follows.
1. India had too many taxes. People did not like to pay them. Tax avoidance and evasion was rampant. The system made crooks out of citizens and left the Govt permanently short of funds. A fundamental reform was needed.
2. The maverick idea was to replace these myriad taxes with just one. A banking transaction tax (BTT). O.5% of every payment > 200 for any purpose would go to the Govt. Hard to avoid, easy to collect, does away with all those CAs, IT Dept Babu's, web-filing, tax probes, the lot.
There was just one flaw. India's use of cash to settle transactions, Benami deals, under the counter payments, even for high value transactions. So to push people into the banking system and pay the BTT, the plan was to do away with any note above 100 Rupees.
There was a somewhat bigger flaw in this grand design. No serious Economist thought it would work. They were accused of being luddites. Anyway #Arthakranti managed to do a PowerPoint presentation to Mr Modi.
And so to end the story, inspired by the cock-eyed vision of Arthakranti, unmindful of the differences between America and India, unpersuaded by the careful planning and reasoning behind Rogoff's proposal for the USD 100, reluctant to seek advice, #Demonetisation happened.
