Paul Krugman terms demonetization a puzzling attempt

It has been almost seven months since Prime Minister Narendra Modi’s much lauded policy move against black money and corruption-demonetization was implemented, but leading scholars, including Noble laureate Paul Krugman are still skeptical about its economic advantages.

In an interview with Times of India, Krugman termed demonetization a puzzling attempt to flush out corruption with a very blunt instrument. Reacting on the question whether pulling out 86 percent of the cash was good for system, Krugman replied- “When it happened, my first reaction was, if I had to guess, the economy would shrink in proportion to the reduction in the monetary base. That did not happen, which is a good thing”.

He, however, admitted that damage to the economy is not as bad as he feared. Krugman’s remark comes in a time when analysts are already blaming on Modi’s shock decision to recall the country’s highest value bank notes last year for the slowdown in GDP growth figure.

The Guardian reported on June that acute cash shortages across India hit the country’s manufacturing and construction sectors particularly hard. According to the report, the manufacturing sector recorded slower growth than in the same period last year, while in the same period the construction sector contracted by 3.7 percent.

Interestingly, Krugman has consistently questioned demonetization decision as part of a drive to tackle income tax evasion. He, last year, warned that India could face significant short-term economic consequences with no significant long term benefits due to the move.

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