Is demonetisation the big bang reform India was waiting for? Experts weigh in

Demonetisation is the latest financial hurricane to hit the country. That the move has been introduced by the Narendra Modi-led government to curb black money and other corrupt practices is now being doubted in wake of low liquidity in the economy.

From standing in serpentine queues outside banks and ATMs to exchange bills that are no longer legal tender or to withdraw the newly minted currency to watching the trade and commerce being hit, demonetisation seems to be the newest demon to be unleashed on the aam aadmi of India by the Centre.

But how do India's noted economists view demonetisation? 

Here is the expert opinion:

1. Rajiv Kumar, senior fellow, Centre for Policy Research: The suffering of the farmers is a mere garb to discredit the benefits that demonetisation brings to the table. Most of the farm-related economies work on a month-long credit system, and we don't realise that cash economy in the rural sector functions on lower denominations.

Even if we talk about the urban sector, the minimum wages in our country is around Rs300 a day, I doubt if there would many high denomination circulation there.

The real problem is being faced by the construction and real estate segment. Almost the entire segment runs on cash - right from brick kilns, construction labourers to fittings, etc.

I don't mind them being whipped a bit. But if you look at the bigger picture, in the economy, this is increasing the deposits of the banks; their cost to capital is decreasing.

However, this must be followed up with substantial rate cuts. If this happens, the dip in the consumption can be complemented with the surge in the investment cycle.

2. Abhijeet Sen, former member Planning Commission: The problem in hand is much deeper and chronic than the unending queues outside banks.

Half of the country's economy runs on cash, and we have already withdrawn 86 per cent of the cash from the market. Labour in agriculture and informal sector, small entrepreneurs they are not only are heavily dependent on cash transactions, but also on informal cash credits.

We can call these credit providers hoarders of black money, but in a way they are also supporting our economy. Unfortunately, there are no alternatives in place.

The initiatives of this government to provide credits to the informal sector, like MUDRA banks, are quite minimal in number. In the long run, you may want to create an alternative, but certainly we are suffering today.

In the last one week, bank deposits have grown by Rs 3.5 lakh crore, and banks have dished out only Rs 50,000 cr back. The government is trying to squeeze the cash supply further. Sadly, the economy is walking right into a temporary phase of recession.

3. Surjit Bhalla, economist: To understand the impact of demonetisation, you will have to break it into three parts; immediate short term, short term and long term.

Yes, there are pains of the cash crunch. When nearly 86 per cent of your cash is pulled out of circulation, you don't want the entire lot to come back to feel relief.

Things will come back to normal even if 60 per cent of the money returns. If it's backed by proper reforms, the impact of the cash crunch would not be more than 0.2-0.3 per cent of GDP.

It needs to be followed with more direct tax reforms, slashing of the income tax rates, rationalisation of the capital gains tax (and stamp duties at states) in real estate sector.

It is probably the biggest reform NDA government has initiated. It is going to reap major benefits. The impact on the formal sector is minimal, major casualities are from the informal sector.

(As told to Anilesh Mahajan.)

Also read - Debunking myths about Modi's demonetisation drive