Demonetisation: Black money chase a delusion, political parties may be real targets, says Jean Drèze

There was absolutely no need for the government to demonetise high denomination old currency notes at a time when economy is racing ahead. This has caused a lot of liquidity distress, especially in the rural regions and triggered a steady rise in layoffs and many tragic deaths, development economist Jean Drèze has told The Economic Times in an interview.

According to Drèze, the entire demonetisation exercise in a booming economy is like shooting at the tyres of a racing car.


Development economist Jean Drèze

The former member of the National Advisory Council during the UPA rule has said the government's statement that the it is a strategy to flush out black money from the system is a mere delusion. The real targets could be political parties who are believed to be cash hoarders that are used during election campaigns, he has said.

"Opposition parties may well be the real targets of the demonetisation move. Being in power, the ruling party is less vulnerable. I am all for preventing fraud among political parties, but this is not the best way to go about it," Drèze has told the newspaper.

Making the high currency notes invalid has pushed rural economy in tatters already, with mandi arrivals of several non-perishable agriculture commodities like cotton, soyabean crashing sharply, according to a report in Reuters.

The report notes that consumer spending makes up 56 percent of India's $2 trillion economy. But with less stock of smaller denomination notes available and the difficulty to get hold of new bills, consumers are holding back expenditure.

Supply chains at small, medium and even larger companies are breaking down, underlining just how much corporate India - not just the shadow economy - relies on hard cash.

Brokerages have also started revising downwards the growth estimates for the economy. Ambit Capital has said the GDP growth is likely to be 0.5% in the second half of the current fiscal, decelerating from 6.4 percent recorded in the first half of this fiscal. It sees the growth in 2017-18 at 5.8%.

The main reason for the demand slowdown is that the country - not just rural areas but even urban - is not yet ready to make a shift to cashless mode.

Drèze has noted that India is still several decades away from being a cashless economy, and the government needs to focus on effective banking services in rural areas to achieve its financial inclusion goal.

He feels Indian may witness a prolonged economic slowdown in a worst-case scenario once the demonetisation issue fizzles out.

Updated Date: Nov 22, 2016 13:04 PM

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