A sensible analysis

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A sensible analysis

Post by confuzzled dude on Sun Nov 27, 2016 8:12 pm

Will the world’s fastest growing big economy show similar resilience and regeneration from deep shock therapy, or will demonetization cure the disease but kill the patient? By withdrawing 86 percent of circulating currency when 70 to 80 percent of transactions are cash-based, has the Indian government burned down its economic house in order to eradicate the pest of corruption?
The move also confuses the black with the informal economy by conflating cash with black money. Demonetization has the potential to permanently damage the latter, which comprises 45 percent of GDP and 80 percent of the workforce. Its main motor is the desire to escape the crushing burden of state taxes, regulations and bureaucracy. India’s formal and informal economies are not quarantined from each other, but form a seamless value chain. For example, almost one-third of the working capital of small businesses comes from the black economy. Can that lost capital be replenished with fresh credit?
A better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.

A major cause for the persistence of poverty and the growth of corruption in India is regulators and tax inspectors who harass entrepreneurs at every rung of economic activity because of the maze of regulations and the thickets of red tape. Shock therapy without institutional transformation enlarges government while minimizing governance; more government equals more corruption. Demonetization cements the Indian government’s reputation for capricious and arbitrary economic actions.
Another governance pathology is the failure to tell friends from foes and a stubborn refusal to listen to contrarian voices from people of goodwill with the requisite expertise. Instead the government’s default mode is to attack any criticism as somehow anti-national or pro-corruption.
http://www.japantimes.co.jp/opinion/2016/11/27/commentary/world-commentary/economic-political-risks-indias-demonetization/#.WDtbuOYrLIU

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Re: A sensible analysis

Post by silvermani on Mon Nov 28, 2016 1:43 pm

confuzzled dude wrote:
Will the world’s fastest growing big economy show similar resilience and regeneration from deep shock therapy, or will demonetization cure the disease but kill the patient? By withdrawing 86 percent of circulating currency when 70 to 80 percent of transactions are cash-based, has the Indian government burned down its economic house in order to eradicate the pest of corruption?
The move also confuses the black with the informal economy by conflating cash with black money. Demonetization has the potential to permanently damage the latter, which comprises 45 percent of GDP and 80 percent of the workforce. Its main motor is the desire to escape the crushing burden of state taxes, regulations and bureaucracy. India’s formal and informal economies are not quarantined from each other, but form a seamless value chain. For example, almost one-third of the working capital of small businesses comes from the black economy. Can that lost capital be replenished with fresh credit?
A better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.

A major cause for the persistence of poverty and the growth of corruption in India is regulators and tax inspectors who harass entrepreneurs at every rung of economic activity because of the maze of regulations and the thickets of red tape. Shock therapy without institutional transformation enlarges government while minimizing governance; more government equals more corruption. Demonetization cements the Indian government’s reputation for capricious and arbitrary economic actions.
Another governance pathology is the failure to tell friends from foes and a stubborn refusal to listen to contrarian voices from people of goodwill with the requisite expertise. Instead the government’s default mode is to attack any criticism as somehow anti-national or pro-corruption.
http://www.japantimes.co.jp/opinion/2016/11/27/commentary/world-commentary/economic-political-risks-indias-demonetization/#.WDtbuOYrLIU

+1 to all those points. Without addressing the underlying issues which create the shadow economy, doing a blanket ban on cash is no good.
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