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Economic Survey's Spin on Demonetisation Doesn't Quite Add Up

Feb 1, 2017

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The Economic Survey for 2016-2017 was released yesterday. The Survey has a chapter on demonetisation and makes some very interesting points which I want to discuss in today's piece.

One of the reasons offered for the Modi government carrying out demonetisation is: "Across the globe there is a link between cash and nefarious activities: the higher the amount of cash in circulation, the greater the amount of corruption, as measured by Transparency International."

The Survey further points out: "In this sense, attempts to reduce the cash in an economy could have important long-term benefits in terms of reducing levels of corruption. Yet India is "off the line", meaning that its cash in circulation is relatively high for its level of corruption."

Is this really true? Is there a link between the total cash in the economy and corruption? Let's take a look at the currency to gross domestic product(GDP) ratio across countries for 2015.


As can be seen from the above table, India's currency to GDP ratio is quite high at 12.51 per cent. But Japan's is even higher at 18.61 per cent. What rank does Japan hold in the Transparency International's corruption ranking? In 2015, Japan was the 18th least corrupt country in the world. Where did India stand? India was the 76th least corrupt country in the world.

Hence, Japan which has a higher currency to GDP ratio than India is significantly less corrupt than India is. This basically means that cash is a greater part of the Japanese economy than it is of the Indian economy, but still the Japanese are less corrupt than the Indians. This goes totally against the point made in the Economic Survey.

Also, Japan is not an outlying one-off example. Take the case of Brazil. The currency to GDP ratio in this case is 3.44 per cent. This is nearly one-fourth the Indian ratio of 12.51 per cent. This means that Brazil has largely moved away from cash or currency as a form of payment. Nevertheless, does that mean that Brazil is less corrupt? As per Transparency International data Brazil is also the 76th least corrupt country in the world, like India is.

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There are other examples as well. At 1.45 per cent, the currency to GDP ratio is the lowest in Norway. At 1.53 per cent Nigeria comes in next. Norway is the fifth least corrupt country in the world. On the other hand, Nigeria is the 136th least corrupt country in the world.

Let me give you more examples. After Norway and Nigeria, come Sweden, Argentina, New Zealand and Denmark, when it comes to low currency to GDP ratio. Sweden is the third least corrupt country in the world. New Zealand is the fourth least and Denmark is the least corrupt country in the world. But Argentina comes in at 107th, much lower than even India, despite having a very low currency to GDP ratio.

Are we done yet? Colombia has a currency to GDP ratio of 6.79 per cent, which is significantly lower than that of India. But it is the 83rd least corrupt country in the world. Or take the case of Singapore, which has a reasonably high currency to GDP ratio of 8.46 per cent, but it is the eight least corrupt country in the world, as per Transparency International.

How about China? China's currency to GDP ratio at 9.34 per cent is lower than that of India. But it is the 83rd least corrupt country in the world, a little below India at 76th position.

All these examples clearly show that there is no clear link between high cash in the economy and the prevailing corruption in the country. And even if there is a link, it is a very weak one. Given this, what do we say about the Economic Survey's observation? To put it simply, the Economic Survey is published by the ministry of finance, which is a part of the government. Hence, not surprisingly, it is trying to bat for the government on the demonetisation front.

What else does the Economic Survey have to say on demonetisation? On page 55 it points out: "A cautionary word is in order. India's demonetisation is unprecedented, representing a structural break from the past. This means that forecasting its impact is hazardous."

This is a very interesting statement. What the Economic Survey is essentially saying here is that forecasting the impact of demonetisation can be hazardous. Why is that? This, for the simple reason that there is no past example of demonetisation in a country being carried out in a situation, like that of India.

As the Survey points out on Page 54: "India's demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances."

Given this unique context, it is risky and dangerous (other meanings of the world hazardous) to forecast the impact of demonetisation. If this is the case, it is worth asking on what basis did the government make the decision to demonetise high denomination notes, given that forecasting its impact is not easy at all. Or so the Economic Survey published by the Ministry of Finance tells us. Further, after warning the readers that forecasting the impact of demonetisation is hazardous, the Survey goes about making several forecasts (on pages 59-60).

Such silly blemishes that bat for the government, spoil what is otherwise a well-written Survey.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "Economic Survey's Spin on Demonetisation Doesn't Quite Add Up"

Sridhar

Feb 1, 2017

I take your point but with this step, the fight against corruption has made a good beginning but it is a long and tedious journey and people are with the Government, 100â„..., especially the honest companies, individual tax payers and generally the public. There are odd vested interest stakeholders affected and yes, that is precisely the point of this exercise..

Like (1)

R Tayal

Feb 1, 2017

Dear Vivek, for a change it is you who is giving a spin to the demonetization debate, by using a nebulous statistic of "cash as a %age of GDP". A much more appropriate statistic would be %age of domestic transactions (by value) that are carried out by digital or non-cash means.

Like (1)

PSR Krishna

Feb 1, 2017

I agree with what you have written. I also agree with the final concluding statement that it is well written otherwise.

Like (1)

Rupamanjari Sinha Ray

Feb 1, 2017

Very well researched article on Economic Survey's comments. In fact Dan Ariely in his book Predictive Irrationality says that dealing in cash produces much less corruption than dealing in kind. In fact government is well aware of the fact that which sections of the economy were badly affected by demonetization and therefore tried to compensate for their losses by announcing some direct tax incentives and increasing expenditure on rural development and agriculture by 24%.

Like (1)

Hari

Feb 1, 2017

"the higher the amount of cash in circulation, the greater the amount of corruption, as measured by Transparency International." does not tally with your claim of no relationship with "currency to gross domestic product(GDP) ratio" While TA talks about volume of currency in circulation your claim is about a ratio that is simply not a proxy for volume of currency in circulation. Anyway common sense points that all nefarious activities can only be financed by cash. Surely you don't negate that?!!!

Like (1)

Yudhvir Talwar

Feb 1, 2017

9015167066. Demonetization entails huge cost of Rs 1 - 1.25 lac crores in printing new currency distribution and accounting old currency besides ill effects on production and employment. Similarly digitization of economy has very large cost which has to be ultimately born by the consumer. The Union Budget does not cater for these cost. This will amount to indirect tax on Indians as product services cost would go up. Banks would recover the cost by lowering interest rates on deposits and borrowers from banks would pay comparetively higher interest. Demonetization and digitization may give the ruling party some short / medium term advantage but long term it will adversely affect the economy.

Like (1)

Bapoo M Malcolm

Feb 1, 2017

"India's demonetisation is unprecedented in international economic history, in that it combined secrecy and suddenness amidst normal economic and political conditions. All other sudden demonetisations have occurred in the context of hyperinflation, wars, political upheavals, or other extreme circumstances."

Methinks you and I were the only ones to call 'demonetisation' improperly termed, because none of what is indicated in sentence two happened. This was an Alibaba story like old lamps for new. REMEMBER THE CROOK WHO TOOK AWAY THE OLD LAMPS. Now the genie won't go back in. We live in La La Land; vive la myth.

Like (1)

P V Samuel

Feb 1, 2017

Mr. Vivek Kaul's critical analysis of the Economic Survey very clearly exposes the fallacy of the argument of the nefarious link between cash in circulation and anti-social activities. Thank you for giving a clearer vision.

Like (1)

Pradeep Kumar Nair

Feb 1, 2017

Apart from the interesting twist the survey talks about on demoneitzation , i find it hilarious that Transparency International is being invoked for reference, the same TI who is otherwise pariah for the current dispensation

Like (1)

Vipul Jasani

Feb 1, 2017

Hi Vivek,

Another good piece of article as usual.

Certainly cash in economy and corruption has no relation. Corruption occurs due to haziness or complex policies.

Corruption also occurs due to centralization of power. Corruption also occurs when there is great amount of injustice or delay in justice for ex case of Salman Khan couple of cases or redevelopment of buildings, or delay in possession of flat, or many types of cases that are in court for generations, etc.

There are many such reasons and India is capital of the world of many such reasons and therefore demonetization can not eradicate corruption from India.

Thanks

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