Monday, December 26, 2016

Behind the Crazed Demonetization in India and What Is Next

This is an object lesson on why revolution, in this case economic revolution, not grounded on principles of liberty can be worse than the pre-revolutionary period.

 The Financial Times reports:
[W]ith India now reeling from the acute cash crunch triggered by the decision to cancel its old Rs500 and Rs1,000 notes, many economists and observers are debating what other unorthodox economic policy experiments may lie ahead.

Mr Modi is expected to intensify his campaign against black money, with his next target likely to be property purchased with illicit wealth and not registered in the true owners’ names. Speculation is rife that he is also seriously considering other dramatic and unusual reform measures — including possibly abolishing income tax and replacing it with a banking transaction tax....

Mr Modi has said nothing publicly about the origin of the idea of demonetisation — a measure virtually without parallel in contemporary economic history — but few believe New Delhi’s official narrative that it was simply acting on the central bank’s advice.

Instead, the measure appears to be the brainchild of a little known Pune-based organisation, called Arthakranti, which loosely translates as economic revolution.

This group is seeking radical changes to India’s revenue-collecting mechanism...

Arthakranti advocates restricting cash use and replacing all of India’s taxes with a single, banking transaction tax of 2 per cent on every transaction through the financial system.

The recent removal of vast amounts of cash from the economy could, some analysts think, be the start of a sustained effort to realise Arthakranti’s vision. “It seems to appeal to a lot of very radical thinkers,” says Saurabh Mukherjea, chief executive of Ambit Capital. “By reducing cash, you force everybody into the banking system, and every transaction gets taxed. If you don’t spend, and don’t transact, you don’t pay tax.”...the idea has already won influential supporters from the politically-powerful yoga guru Baba Ramdev to the former editor of Forbes India, R. Jaganathan.

Under these conditions expect a larger black market to emerge with its own new medium of exchange. Black markets are always less efficient than free markets. It would be a major decline in the standard of line for those in India.

Notes FT:
Brazil imposed a banking transaction tax for a decade from the late 1990s. Yet later assessments concluded the taxes tended to drive transactions from the banking system, reducing efficiency and leading to higher interest rates.


  1. "Under these conditions expect a larger black market to emerge with its own new medium of exchange."

    And that is going to tick off the governments big time. It'll be interesting to see how the governments, and the people using the government's money, react to a "free market" medium of exchange - especially if/when the currency for System D is perceived as better in both value and quality.

    Will it be the Birmingham Button Makers all over again?

  2. So India is trying to implement Richard Pryor's scam from Superman III?