21/11/2016 9:28 AM IST | Updated 21/11/2016 10:06 AM IST

Demonetisation Should Be Gradual And Eliminate Large Notes Entirely, Says Harvard Economics Professor

"It could take years to know how history will view this unprecedented move."

Bloomberg via Getty Images

In the Princeton University Press blog, Kenneth Rogoff, economics professor at Harvard University, argues that demonetisation should be a slower process, and remove large notes entirely.

In his book, The Curse of Cash, Rogoff has also argued "for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time."

Rogoff, former chief economist of the International Monetary Fund, who also holds the Thomas D. Cabot Professor of Public Policy at Harvard University, writes, "In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences."

The second point which Rogoff makes is to eliminate large notes entirely. "Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes," he writes.

"Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi's idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote," he writes.

Rogoff also says that his book about eliminating cash is aimed at developed economies where more people have effective access to banking. As he points out, in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India.

On whether the Modi government's plan would be successful, Rogoff writes, "long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move."

"What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage," he writes.

Read his full blogpost here.

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