ECONOMYNEXT - Demonetisation is always theft and its contradictory effect on the money supply, coupled with a negative confidence shock, will hurt Indian growth, a top international economist said.
"Demonetisation is, in principal, a mistake because it involves a theft - taking of private property by the State," Hanke told Rediff.com, a popular internet portal i
"As a practical matter, it is one of those bad Indian ideas that has been tried twice in the past in India, with two failures for the record books."
"It should be noted that the record books are filled with failed demonetisation (theft) programmes. For example, the bright boys in North Korea engaged in a demonetisation of the won in 2009, and like night follows day, it was a disaster and further fueled an expansion of North Korea's underground economy."
Ironically, Indian Prime Minister Naredran Modi decided to demonetise (make worthless) large denomination rupee notes overnight, sending the Indian economy and the lives of ordinary Indians into a tailspin.
The ostensible reason of making paper money worthless was the failure of the Indian law enforcement authorities to combat corruption and a black economy.
"The reason for the massive underground economy and associated black money in India is because of government regulations, a weak rule of law and uncertain property rights," explains Hanke. "This state of affairs will be very hard to change."
India's broad money supply has already taken a hit with economic activity, especially rural India taking a hit.
"Unless the Reserve Bank's monetary policies and policies associated with commercial bank regulation and supervision can be altered to get broad money and credit to the private sector back on track, slower nominal growth is baked in the cake," Hanke warns.
In addition to domestic citizens, money changers in several Asian cities where there were a large number of expat Indians and their customers were badly hit, underlining the fact that the Indian rupee was a third world currency in which confidence was sadly misplaced, analysts have said (Sri Lanka should never again demonetise like India, giving reasons to trust the dollar: Bellwether)
"Demonetisation will do what it's already been doing: It will throw a wet blanket on the rupee, which is a second-rate currency in any case," adds Hanke. "Ask any Indian whether they would prefer the rupee or the US dollar in their pockets."
Meanwhile, India's government has tried to dress up the fiasco as a move to make the country cashless.
"The idea of India going cashless is a bit of a joke," says Hanke. "India has been one of the most cash-intensive economies in the world for many moons. Whoever believes that India can become cashless in the foreseeable future must believe in the tooth fairy." (Colombo/Feb13/2017)