Notes ban will hurt economy: former chief economist of World Bank

Comparing the current situation to a similar move orchestrated by the government in 1978, Basu highlighted how the move damaged the country’s economy in 1979-80

“Demonetisation will cause the economy to run into great difficulties in the future. Declaring the old Rs500 notes legal again might minimise the damage majorly,” said Kaushik Basu, former chief economist, World Bank. Basu was delivering a lecture at the Indian Institute of Technology-Bombay (IIT-B) on Friday as part of the N R Kamath Chair Colloquium.

IIT-B director Devang Khakhar (left) with Kaushik Basu. (HT Photo)

Talking about ‘the economics of corruption, black money and demonetisation’, Basu examined the statement made public by the finance ministry, a day after demonetisation was announced.

“The ministry said this move will help control the printing of fake currency in our country. However, what is happening instead is that people are exchanging their notes, fake or not, for fresh new notes. This is not solving the problem,” he said. He added that the government should focus on producing better quality currency. He said that instead of helping control inflation, this move might damage the economy further.

“Even the idea of walking towards a cashless society is a long stretch for India. Currently, close to 98% transactions take place through cash. Even the US would take 10-12 years to achieve this goal,” he said.

Comparing the current situation to a similar move orchestrated by the Indian government in 1978, when it banned Rs1,000 notes, Basu highlighted how the move damaged the country’s economy in 1979-80. He said the only way to save prevent intensive damage this time around was to scale back. “The government must accept its mistake and take responsibility. It must take a step back and reverse part of the decision. People will be angry, but this will help minimise the problem,” concluded Basu.

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