RIP India's Economic Liberalization

PM Modi's demonetization is a scheme to rob private enterprise, just like his socialist predecessors did.


Two weeks ago, India's Prime Minister Narendra Modi effectively suspended his country's three-decade-long flirtation with economic liberalization and appointed himself economic czar.

Out of the blue without consultation with the Parliament, his party, or his economic advisors, he launched a scheme called demonetization that declared 85 percent of India's currency null and void, I explain in my column at The Week. Within hours of his announcement, India's highest currency bills Rs. 500 ($7.50) and Rs. 1,000 ($15) ceased to be legal tender. He announced that they would be replaced by new Rs. 500 and Rs. 2,000 bills that people could swap at designated banks with proof of ID.

The ostensible purpose of the move is to flush out untaxed "black money" and modernize India's cash economy into an electronic one. The real purpose, as GMU's Larry White and SUNY's Shruti Rajagopalan explain, is to confiscate private wealth.

Everyone is getting a basic allowance to swap the old currency with new money at designated banks with proof of ID (which itself is an insane demand in a country where 600 million poor people don't have bank accounts and 300 million don't have IDs). Anyone exchanging beyond that allowance would have to explain how they acquired the money. Those swapping hordes of unaccounted for cash would be subject to penalties and jail. The unreturned money will default to the government.

Given that 90 percent of economic transactions are in cash and off the grid, this could work out to a pretty tidy windfall for the government. Estimate White and Rajagopalan:

"[I] f 20% of the old notes are never turned in, the government's revenue windfall is up to Rs. 2.9 trillion ($42.5 billion)… The destruction of the private wealth of non-redeeming old-note holders, combined with the revenue windfall to the government, makes the currency policy effectively a large capital levy, a massive one-shot transfer of wealth from the private to the public sector."

But it's not just the rich who'll get poorer under this heist, the poor will get even poorer because, note White and Rajagopalan, the reinjection of the new currency into the economy will lead to all kinds of regressive effects:

New currency notes are presently entering the economy through the formal banking system under Reserve Bank of India regulation. The notes injected this way are taking time to reach the 600 million Indians who do not have bank accounts. In the meantime, with currency-dependent sellers of goods and services having lost their unbanked customers, those who receive the new currency notes first can buy goods and resources at depressed prices. The terms of trade turn against the unbanked sector, and the relatively wealthy banked population receives a transfer from the relatively poor unbanked population. The skewing of relative prices and incomes will persist until the access to new currency notes flows throughout the economy.

There is also a geographic skewness. Tea vendors in the city of Mumbai, for example, where new currency is appearing relatively promptly, are less hard-hit than tea vendors in the rural villages of Maharashtra.

The currency shortage may also cause structural imbalances in the economy for longer production processes. For instance, mid-November is the sowing season for the Rabi (winter) crop in India, which is harvested in spring. Farmers lacking access to valid new currency notes have been struggling to pay for seeds to sow during this crucial time. Farmers who thereby miss the sowing season will lose their entire year's earnings, even though the shortage of notes is temporary. Industries supported by farmers (fertilizers, machinery, etc.) will also see a fall in demand, and earnings. The relative price changes may persist until spring, at the time of harvest, even if the shortage of currency is resolved sooner. Close to half of Indian families are engaged in agriculture, and it accounts for 16% of the GDP. The government yielded to obvious necessity last week and announced that it would grant farmers a special dispensation allowing them to use old 500 rupee currency notes through the sowing season. But similar problems arise in other lines of business, which the government cannot anticipate and make timely exceptions for. Another example is construction, an almost entirely a cash-based industry, where current projects are being postponed until new currency notes become sufficiently available. This postponement will have effects on housing supply and prices for several years ahead.

But the biggest tragedy of Modi's demonetization scheme, I note in my column, is that because it does nothing to eliminate the underlying causes of tax scofflaw behavior — India's tax burden that includes hidden levies such as bribes to bureaucrats — black money won't actually disappear. People will simply park less of it in cash and more in harder-to-trace, non-cash assets such as gold and real estate, which already account for almost 60 percent of household savings. (Poor households have taken to buying jars of Tide to barter for goods and services, giving new meaning to the term money laundering.)

This means that this crackdown will set the stage for future crackdowns. Indeed, Modi, who himself will always be able to indulge his taste for $16,000 suits, has already indicated that he's on the job.

RIP India's liberalization.

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  1. How’s the donation webathon going?

    1. They have Shikha on her best behavior so hopefully well.

      1. I liked the article! Still feel bad about my harsh words a few days back, that’s not like me; flame whoever you want to flame Ms. Dalmia, that is your right.

  2. Hey a decent Dalmia article!

    1. Its about a week late.

      Probably took that long to edit out the idiocy.

  3. Why do I get the feeling he’s going to be announcing a trade pact with the Phillipines soon?

  4. RE: RIP India’s Economic Liberalization
    PM Modi’s demonetization is a scheme to rob private enterprise just like his socialist predecessors

    Well…how else are you going to keep the masses poor if you don’t incorporate socialism into the country?

  5. But, but, but only government can manage the money supply!

    1. Related derp: While TV tropes mostly avoids political topics for good reason, it does occasionally crop up. Under the “Real Life” examples section of the Can’t Live With Them, Can’t Live Without Them trope page, there is this gem:

      Taxes. While no one likes paying taxes, without them we could have no roads to drive on, no police and military protection, and much more.

      Without taxes, we wouldn’t have fewer roads or less well maintained roads. No, we would have no roads at all. Nobody could figure out how to build roads until the government showed them how. And nobody ever wanted to pay for a road until they were forced at gunpoint.

      This is what many people actually believe.

      1. Apparently they never lived somewhere with an HOA.

        1. Was it MNG or one of our other trolls that used to argue that an HOA was a government?

          1. It was a different one, can’t remember who now.

            1. MNG. Hours of my life I will never get back.

          2. An HOA *is* a government – just one form of anarchist self-organization.

            And like all governments, sometimes you need to shoot a couple HOA board members to remind the others who they work for.

      2. And all of the inventions that NASA invented would never have been invented if it wasn’t for NASA. I was having an email discussion about this topic not that long ago and we couldn’t quite nail down what leads people to believe this.

        1. *email discussion with my dad

        2. The funny part about modern-day lefties holding up NASA as an example of “government done right” to me is that NASA at its height was a ruthless meritocracy of a sort impossible to have in government today, and many of their advancements were dependent on literal ex-Nazis working on the programs.

          1. Not only that – ‘government done right’ is an example of massive waste and expense directed at the goal of national glorification at the expense of the people of the nation.

            1. Sure, all of that. But they did land someone on the moon. They’ll be forever crowing about that accomplishment, even though NASA hasn’t done much of note that was genuinely innovative since the first moon landing.

          2. They had a pile of money in the Mercury Gemini Apollo days, I think 5% of the fed budget at peak. Efficiency was not their byword.

      3. Without taxes, we wouldn’t have fewer roads or less well maintained roads. No, we would have no roads at all.

        I had this discussion with my Mom recently. It was sad a few times over because a) she isn’t exactly anti-libertarian and b) we *both* grew up on unmaintained gravel roads.

        I strongly suspect that with subtle but concerted effort, in a generation, you could work things like asphalt, concrete, copper wire, etc. into Genesis if you wanted to.

  6. When American politics seems like a horrorscape it’s nice to turn to foreign affairs which are truly 9th level shit.

  7. *reads*


    Yep, a good article.

    1. *rubs finger tips together, opens palm*
      -Matt Welch

      1. *grumbles and reaches for credit card*

      2. “Don’t fuck this up, Shika, we’re trying to get money from these people.”

        -Also Matt Welch

        1. Probably a better idea than “Donate or the social-signaling writer gets it!”

  8. Yeah, this seems like a sufficient casus belli for the Indian people to rise up and overthrow the government.

    1. Truly. Turning money null and void for the benefit of the political elite has to be one of the more legit reasons to ‘burn this mother down’.

      1. And this time they have a clear target. It’s not just a faceless agency. Modi is directly responsible, according to the article.

    2. If they’ve tolerated all the other shit their government has done over the last 50 years this isn’t going to faze them.

      Hell, people literally had Maduro surrounded on the street, cut off from protection – and all they did was yell at the dude.……html?_r=0

  9. I’ve asked a couple of Indian acquaintances about this, and I get the impression that at best, “he has good intentions”.

    All I can think of is “what a clusterfuck!” — it seems like such a poorly planned, poorly thought of fiasco. Even if it was his intention to cripple private businesses, how out of touch can he be to think that it would work, requiring IDs and bank accounts, which half the population don’t have? How could he think it would work, to cripple every street vendor, small business, farmer, and half the households?

    It seems like such a monumental fuckup in every way, trashing the economy in such a basic fashion. I don’t think even Mao’s or Stalin’s starvation plans, or Hitler killing Ukrainian partisans who would have helped defeat the USSR, were anywhere nearly as poorly thought out.

    1. I didn’t think of it that way, but you’re right. Even with the agricultural disasters of Mao and Stalin, there’s at least a train of logic that you can follow, even if we know that the results are predictably faulty.

      But this…this is just Pol Pot* level insano-nonsense.

      *not in body count, but in how much thought seems to have been put into it

      1. I figure everything man does has some kind of purpose behind it, no matter how insane it seems or no matter how self-destructive. Mass murders, genocide, killing millions of able workers in the name of racial purity — always can find some kind of reason.

        This one just baffles me. The stated reasons make no sense. If Mao had said we must starve people because there’s too many rats feeding off too much human waste, that would make more sense.

        Yet I keep on thinking there must be a real reason which will become apparent some day, like traffic suddenly slowing down for no reason and finding out there’s a cop running a traffic break. I just can’t imagine what it could be. I can only think he’s a Pakistani mole trying to destroy India, an extreme socialist gone off his meds, nothing makes sense.

        1. According to NPR this morning it’s all good, just a public servant battling corruption. But seriously, millions of people forced into the world of digital money. Who could possibly benefit?

    2. We should avoid “exoticising” knee-jerk Modi love. One of his biggest fanboys, and an enthusiastic backer of this step, is Bill Gates. I think that, while economists (including uber-demonetizer Larry Summers) are pretty heavily against, “technocratic types”–are kind of in love with Modi’s boldness and apparent future-oriented thinking. “It will hurt but it will be great in the long term,” they say.

      I had always assumed that this move was for one thing–to get middle-class Indians to pay their taxes. It will certainly do nothing against bribery, corruption, or even tax evasion for either the very wealthy or very poor. But folks who had been hiding substantial amounts in rupees will have to bring them above ground. Of course, as the article points out, some of the official scofflaws will simply take the hit to avoid jail time.

      The whole thing is cruel, appalling, and insane, of course. But I think that’s the reason.

      1. Kinda sounds like the middle class wouldn’t actually exist if they paid their taxes.

        Fuck tax collectors.

  10. In other words, Trump will love this.

    1. No way anything like this would fly in the US. We have much more sophisticated ways to devalue our currency.

  11. I’m gonna call it now – after this craters their economy, he starts wearing a Nehru hat.

    1. I predict a few million fucked up construction projects, vacations, building projects and he either backpedals quite fast or gets the boot. Blood is going to flow when people cannot even go buy food or pay a doc.

      1. Not seeing politician blood in Venezuela yet.

  12. I’m not going to be around for PMS link so I’m pre-posting this fever dream of a website. Enjoy.

    Islamic Bondgirl Alison Doody: Called To Jihad

    Every James Bond movie has at least one of such Bondgirls, usually infidel bitches, obsessed with their independence, originally fashion models mostly, but usually, there is more of them (up to ten, in Moonraker). Without any doubt, to have a role in a Bond movie can be a breaking point in the professional artistic career for any such woman, and the Bondgirl status is highly desirable for any hungry fashion model, as it can bring her everlasting fame and tabloid media attention.

    But the fame passes one day, and they often disappear, together with their beauty, as they are aging, only their former shining presence remains on the movie reels, preserved forever. But a woman can’t live only from her nice memories, and the life simply goes on? and in present world, where many people are converting to Islam inevitably, from various reasons, even several Bondgirls became the devoted Muslim women.

    At least these Islamic names are publicly known: Alison Doody (View to a Kill, 1985), Famke Janssen (GoldenEye, 1995), Anne Lonnberg (Moonraker, 1979), and Sophie Marceau (The World Is Not Enough, 1999).

    1. What the heck was that all about? I looked up Alison Doody; no Islamic connection I could see. Don’t remember her in any of her movies. I skimmed TFA but couldn’t stomach actual reading. Is he trying to say she converted to Islam? Does that suddenly make her a Good Person?


    2. usually infidel bitches

      C’mon, Bond is an quintessential equal opportunity lover.

    3. In case of Alison Doody, this woman was born literally with a golden spoon in her mouth.

      Note to self: Golden spoons ineffective as IUD.

      1. Considering the context of that line, don’t you mean “…ineffective as dental dam”?

        1. As a guy I freely admit to being completely confused as to how or why it was in there in the first place.

          I’m still not entirely sure its not a euphemism for peeing on someone while cuddling with them or something.

  13. So now we can import Indian engineers at two for the price of one?

  14. Bitcoin seems to be working well in Venezuela. Why not India?

    1. You need a computer? Or at least a smart phone. India be po. Like really po.

    2. Um….600 million people that are just above subsistence level, maybe? Not exactly toting around computers or smartphones.

      1. Not exactly toting around computers or smartphones.

        Not to mention plenty of stories of people getting cell coverage along the entire day’s journey to get fresh water makes which particular currency gets used at the exchange seem excessively detail-oriented.

      2. If only there were some other way to exchange money that didn’t involve fiat currency.

  15. He announced that they would be replaced by new Rs. 500 and Rs. 2,000 bills that people could swap at designated banks with proof of ID.

    So the plan is racist.

  16. There was a cool BBC article about people doing their best to avoid the measure.

    Many are afraid to deposit all their money into the banks, because the government has said that unaccounted for money will attract a 200% tax penalty and an investigation into the source of income.

    But people like Mr Kumar are ready to help them.

    “The government has said no questions will be asked if my account balance is less than 250,000 rupees (?2,947; $3,664). I can deposit your ‘black money’ into my account. I will charge 10% and give you back the remaining amount after a few weeks,” he tells me earnestly.

    1. Kumar – doing Gods work in the toughest parts of Delhi.

      1. One wonders where Harold is in all of this.

        1. *throws White Castle burger at Paul*

    2. “This is even better than that Nigerian Oil Minister who got in touch with me about an inheritance!!!”

      1. I thought “Reverse 419?” when I read it.

        But hey, it warmed my heart that people will find a way around stupidity…

  17. Out of the blue without consultation with the Parliament, his party, or his economic advisors, he launched a scheme called demonetization that declared 85 percent of India’s currency null and void


  18. So if you continue trading using those bills, money isn’t changing hands, and therefore you owe no taxes on the transaction?

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