Richard Thaler did not endorse Narendra Modi's demonetisation; his tweet on Rs 2,000 is still relevant

When the Royal Swedish Academy of Sciences announced the economics Nobel for Richard Thaler, there was much commotion in the social media in India. Some of the twitter users circulated a 8 November, 2016 tweet by the well-known economist supporting the decision of the Narendra Modi-government to demonetise Rs 500, Rs 1,000 currency notes mainly to curb the cash component of black money in the system.

Soon after Prime Minister Narendra Modi announced that the high value currency notes in circulation are being banned and will become worthless pieces of papers in a matter of a few hours, Thaler had tweeted in support of the move.

"This is a policy I have long supported. First step toward cashless and good start on reducing corruption," he said in a tweet.

 Richard Thaler did not endorse Narendra Modis demonetisation; his tweet on Rs 2,000 is still relevant

Nobel Prize winner Richard Thaler of the University of Chicago Booth School of Business,

But, that was only one part of the story. After he was informed that Modi has introduced Rs 2,000 notes as part of the move, his immediate reaction on Twitter was "really? Damn." In short, Thaler was in agreement with the idea of removing cash from the system but not in favour of replacing a set of currency with another. This disappointed the economist.

However, what some of the twitter users, notably head of the BJP's IT cell Amit Malviya, did was to tweet the first part of his reaction and conveniently conceal the second part, in effect misleading the public. The tweets by these handles were widely retweeted on the microblogging site. According to media reports, central ministers too retweeted Malviya's tweet.

Remember, Modi's demonetisation has, of late, come under heavy attack from various quarters including senior leaders from within BJP, who alleged that the move further worsened an already existing slowdown in the economy, with small-scale sector suffering the most.

As is evident from Thaler's second tweet, the most relevant question still is this: If indeed, as the government claims, note ban was intended to push the Indian economy towards cashless, why was Rs 2,000 introduced at all?

It is a widely acknowledged fact that high value currencies are a boost to illegal or parallel economy. That is why Firstpost's Dinesh Unnikrishnan argued in an earlier article that if the government wants to kill illegal cash transactions, it should make Rs 200 the top denomination and scrap all high value currency notes such as Rs 500 and Rs 2,000.

"...The Rs 2,000 pink notes never really helped the common man for daily transactions as there wasn’t enough change available (even after seven months of demonetisation, there are still reports of cash shortages in ATMs)," he argued in the article published on 16 July, 2017.

"Most economists would agree that the evil of cash-based illegal transactions happen mostly using high value currency denominations. The only way to address this problem is to bring down the value of units in circulation and focus on circulating lower denomination notes for public use," he said.

A case in point is children rights activist Kailash Satyarthi's comments on demonetisation. Satyarthi, who won the Nobel Peace Prize in 2014, had supported the move soon after the announcement. He had said that it would reduce trafficking of children.

However, two months later, he found out that the move had not had the desired impact. "I'd expected black money-driven human trafficking would be crippled completely following demonetisation. But no significant effort is being seen on ground," he told The Times of India, adding that traffickers were using Rs 2,000 notes.

Clearly, the issuance of Rs 2,000 has defeated one of the stated objectives of demonetisation to gradually eliminate the use of cash in the system.

Thaler's tweet is still relevant.

Updated Date: Oct 10, 2017 13:29:42 IST