The government's sudden move to declare all existing Rs 1000 and Rs 500 notes illegal has come as a befuddling moment for almost everybody. While the initial hours were spent in asking basic questions to understand various aspects of the move, attention must now also be turned towards understanding its wider ramifications.
Catch spoke to well-known economist Ashok Desai who has served as chief consultant to the union finance ministry. Desai was the chief economic advisor to the government of India in the 1990s and worked with the then Finance Minister Dr Manmohan Singh. Desai was a part of the team that worked on key economic reforms in India.
Here's what Desai had to say about the issue of demonestising -
Charu Kartikeya (CK): How much will this decision impact the black money problem?
Ashok Desai (AD): It may restrain second-hand property prices for a while, but is unlikely to reduce demand for cash, which is one form in which black money is held.
CK: Was this expected? Is this a logical follow up after the voluntary income disclosure scheme?
AD: I did not expect it, but it is not a surprise, given this government's belief that there is a lot of black money and that it is capable of uprooting it.
CK: What will be the overall impact on economy? Which sectors will be affected most and which will recover faster than others?
AD: It will probably depress the property market for a while. Property prices were rising at 40-50% per annum in the last years of the Congress government. The rate came down to 20-30% on the advent of the present government. Now it will come down further - and add to banks' bad debts. There will also be shortages of currency notes in some parts of India.
CK: Will property prices recover from being reduced to only their registered value?
AD: They will not come down to their registered value. Transactions in government's property register are always at the "registered value", and registered value has nothing to do with actual prices paid, except for a certain proportion of new properties.
CK: Is there an international precedent to this?
AD: Not to this, no other country gets worked up about "black money" as money that escapes taxes. Most countries learn to design taxes that are collectable.
The US does get worked up about American companies not bringing in their subsidiaries' profits from countries that have lower tax rates, and made a big noise against it some years ago.
Germany gets worked up about Germans driving across to Switzerland with suitcases full of cash and leaving them in Swiss banks. It worked out a compromise under which Switzerland gave Germany some information.
Switzerland also gave some information to India some time ago. But whether the information is about all tax evaders or 0.1% of them is anybody's guess.