Archive for January 10th, 2017

Happy 15th birthday, euro banknotes!

January 10, 2017

Keeping aside the criticism of the Euro currency project, this is really a cute video celebrating its 15th birthday. It has these children from different parts of Europe telling us about their best note and what they can buy from these notes.

With digital currency lobby taking control of things, in some years (or decades) all such videos will be part of history. This is going to be sad as currency notes  and coins help make children  sensitive towards money and savings (via piggy bank etc). They are also a very nice way of teaching children concepts of math…


Why we should demand disclosure of RBI Board minutes than mere MPC minutes…

January 10, 2017

More and more skeletons are coming out of the cupboard.

We are told that RBI Board advised the government to withdraw currency notes of Rs 500 and Rs 1000 denomination.

Now, the central bank itself seems to have told the Parliamentary Committee that they  acted on the government advice:


Economic Consequences of Demonetisation: Money Supply and Economic Structure

January 10, 2017

Prof Arun Kumar is the foremost authority on the subject of black money. In an earlier interview he had explained that this exercise will not lead to much gains for the government.

Now in another piece in EPW, he puts all the ideas together and explains how we should think about the issue. This is as good as it gets. He starts with concept of money supply and what demonetisation does to it. Then he takes the money supply argument to see the impact on economic structure.

He sums up:

It has already been pointed out that demonetisation by creating a shortage of currency has impacted the money supply through the money multiplier. It has also affected the velocity of circulation so that the transactions in the economy have been forced to contract leading to an impact on production and income generation.

Is this reversible with the restoration of liquidity over time? Indeed, in the short run, this is feasible but not if it persists for more than a month or so. Profitability of enterprises has been dented due to a decline in production and the build-up of inventories. As capacity utilisation was already a problem, it will fall further and this would lead to a cutback in investment and employment. This would result in long-term consequences and the situation could become irreversible.

If after a while due to a decline in demand, prices also fall, asset prices could also drop and this would impact demand from the well-off sections of the population. This would be on top of the fall in discretionary demand. The effect would then become more long-lasting.

Demonetisation may destroy a tiny part of the black wealth but it would not stop black income generation (Kumar 2016b). In the case of real estate, white and black prices may both fall. However, it is possible that the white price falls more leaving the black price more or less unchanged. Thus, black wealth may remain unaffected while white wealth falls.

One of the arguments given in favour of demonetisation is that tax collection would go up, allowing the government to spend more on pro-poor schemes. This expectation may not be fulfilled since the money being deposited in accounts is being put mostly in small parcels which will be below the taxable limit. The income tax department is also not equipped to deal with such a large number of cases. So, not much of the black economy may be unearthed by the present move. More importantly, any gain due to bringing a small part of the black economy in the tax net would be more than annulled by the big decline in the white economy (being witnessed) and the loss of tax collection there.

It is also argued that the banks are now flush with funds and they can lower the lending rates thus benefiting production. This is unlikely to happen in a hurry since banks are too busy dealing with the currency shortage to have time to lend, etc. Also given the uncertainty, investment and demand for funds would decline. Finally, in a period of demand shortage, lower interest rates would not lead to increased demand or production. Yes, enterprises would get some benefit of lower costs.

All in all, a move that was expected to be a historic high for the government is leading to a crisis where there was none before the announcement of demonetisation. Even now, an immediate release of liquidity already with the banks can lead to a reversal before irreversibility sets in.

But do read the whole thing. Talks about lots of inter-related issues which have been missing from most analysis..

Institutional identity of Indian central bank has been damaged….

January 10, 2017

This blog had warned that we should be more careful while judging central bank appointments. There was a wide feeling by wide number of experts that the appointments at the Indian central bank signals recognition for expertise, need for continuity and what not. Others added how the newly constituted MPC had put India in the league of global peers and how they along with the government will power India into the next set of growth.

How quickly all these beliefs have changed. Even skeptics like this blog are stunned by the sheer pace of the events. Enough has been said about state of governance within the central bank. Even the MPC members will not know their role as they just paused in December meeting. The experts said that this was a clear signal that RBI independence is back (so quickly!). The bankers all praised the move only to cut the rates in new Year of 2017 like not seen before. Not one statement has been made on the relevance of having so many experts decide interest rates when they can be changed so easily. It has taken

In the interim of all this we had another announcement of a new central bank appointment. And again we saw similar views as made in August. One would think there would be some learnings but alas there is nothing of this kind. All these repeated mistakes keeps taking you to this stinging piece on state of media in India.

All this while, it has been disappointing to see former central bank officials not coming to help the organisation. This has been the practice in India for a long time as outgoing officials don’t comment on policy much letting successors do their job. But this is not a day to day thing and clearly requires former heads to come and share their views. But instead they were telling us things which could have been best left to analysts.

Now, finally we have Dr YV Reddy raising concerns:


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