HTLS 2016: Demonetisation gains uncertain, says Nobel laureate Paul Krugman

Noble laureate and economist Paul Krugman has termed India’s demonetisation move as “unusual”, saying while there are “significant to low costs“, it is hard to see “significant gains” from the decision.

It is difficult to see major gains from India’s decision to drain out high-value banknotes from the economy, and the move might only force the corrupt to become more careful in the future, Nobel laureate and economist Paul Krugman said on Friday.

Paul Krugman, professor of economics at the Graduate Center of the City University of New York, during the Hindustan Times Leadership Summit at Taj Palace in New Delhi on Friday.(Virendra Singh Gosain/ HT Photo)

Instead, Krugman said, there will be significant-to-low costs to the so-called demonetisation, although he still saw India as a high-prospect economy.

Speaking at the 14th HT Leadership Summit, the 63-year-old economist said there was a good case to be made that high denomination banknotes didn’t serve a legitimate purpose.

What Krugman said

India’s demonetisation move was unusual, it’s hard to see significant gains from the decision.

Demonetisation move was ‘highly disruptive,.

India somewhat looks like China with a 15-20 years lag.

China is up there in the same order as the US and European Union

“But that did not happen here. High-value notes are not being eliminated. This seems like a one-off attempt to flush out illicit cash,” Krugman said of the government decision to scrap 500-and 1,000-rupee bills to purge the economy of illicit “black money”.

The government has issued new 500-and 2000-rupee bills, and said it will later bring back new Rs1000 notes as well.

Krugman, who won the Nobel in 2008 for his work on global trade, said while he could understand the motivation for demonetisation, the move was “highly disruptive”.

Read| Demonetisation pangs will last for a quarter, but benefit India in long run: FM

But could such an exogenous shock transform behaviour? “I would be happy to be proven wrong. There could be some permanent change in behaviour. People will be more careful and sophisticated in laundering their money in the future,” he said.

Krugman said Indian economy, to him, looked like “China with a 15-20 year-old lag”.

“It has reserves of entrepreneurial rigour, reserves of educated people, wide use of English, and unlike China, it has not hit the demographic wall. It has a lot of potential.”

Watch | What Paul Krugman thinks is the Change India Needs

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