Missing the Woods for the Trees


(05.12.2016) : We have a situation when side effect has overshadowed the main. The suddenly announced demonetization has drastically reduced the volume of currency in circulation leading to currency rationing and controls on a very large scale. As usual such mass rationing led to black-marketing as evidenced by seizures of substantial quantity of new Rs 2000 notes. More than 86 percent of currency in circulation was withdrawn. Going by simple monetary economics, which was the tool of neo liberals to smash the post World War UK welfare states, when currency in circulation and velocity of money supply both fall, country' s output falls. This will affect revenues of the government and in turn social sector spending. Private Consumption Expenditure will fall and in turn trade output and Gross Domestic Product will fall.

Two more important aspects need mention 1. In the planning era, it was widely propagated that socialistic mixed economy was the breeding ground for black money and corruption. Now with substantial liberalization, and low tax rates, problem of black money has exacerbated. 2. The major portion of black money is in assets other than cash. By extinguishing certain stock of currency, can the future flow be curtailed? The short run costs are obvious. Long Run impact is at best ambiguous. As long as a profit accumulation based mode of production persists, black money flow is likely to persist. Added to this, there is a war cry against progressive taxation which does not augur well in a society with growing income and consumption inequality.