Is Demonetization Digitization?

If the demonetization push is a digitization of money push in India then it is as marvelous as India skipping landlines and going straight to wireless phones. But the long lines at the banks is a big problem. And if the reports that this push will bring the growth rate down a few points is hugely alarming. I am a little confused for lack of information.

Is it just a push to replace old cash with new so as to make invalid what is called "black money?"

This is a huge gamble. If the GDP growth rate is cut by one or two points because of this, Modi will pay the political price.

Demonetization in India: Who Will Pay the Price?

“Its impact could be even bigger than GST (the Goods and Services Tax which is still running the gauntlet of politicians).” Adds a report by Crisil, a global S&P company: “Tuesday’s move could change the face of the Indian economy, improve the government’s fiscal position and tax compliance. The size of the cash economy will shrink, as will black money generation avenues, because of the better cash-flow trail.” ..... “This [demonetization] is a step which will make a positive difference, if the transition challenges get handled well by the administration,” says Jitendra V. Singh, Wharton emeritus professor of management. ...... The International Monetary Fund (IMF) echoes those sentiments. “We support the measures to fight corruption and illicit financial flows in India,” said a spokesperson. “Of course, given the large role of cash in everyday transactions in India’s economy, the currency transition will have to be managed prudently to minimize possible disruption.” ..... as of March 2016 currency in circulation amounted to Rs16,415 billion. Of this, Rs500 notes accounted for 47.8% in value and Rs1,000 notes another 38.6%. Together, they were more than 86% of the value of the notes in circulation. That’s a whopping amount to be frozen in one fell swoop. ...... the “resulting disruption in the real economy stemming from this move is very significant and potentially fatal” for some vulnerable sections of society..... for sectors like real estate, a notorious hotbed for black money transactions, there will likely be disinflationary pressures short term, with prices being pushed downward ..... Real estate shares have plunged, in some cases by more than 30%. ....... Kar is the author of a report titled “The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008.” The report estimates India lost a total of $213 billion due to illicit flows in that period. “The total value of illicit assets held abroad represents about 72% of the size of India’s underground economy which has been estimated at 50% of India’s GDP (or about $640 billion at end 2008),” says the report.

The Trouble With India’s Demonetization Gamble

Economists have argued that this move has left the biggest chunk of black money untouched – the stacks that lie in undisclosed accounts in Swiss Banks. ...... Economists have argued that this move has left the biggest chunk of black money untouched – the stacks that lie in undisclosed accounts in Swiss Banks. ...... Refugees who lack the requisite documents to create accounts are also now seeing months of savings potentially vanish, as they still lack mechanisms to access the banking sector. Socially ostracized communities who are again disproportionately cut off from the banking systems – like transgender communities and sex workers – are other immediate victims. This is in addition to the fact that reports indicate that the government may have over-estimated the existing levels of connectivity to banking. ...... While it is too soon to declare whether the long-term gains are indeed forthcoming, the “short term” sacrifices have been more than just significant. They have been immensely painful.

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