Tuesday, December 13, 2016

Pradhan Mantri Jan Dhan Yojana

Aleph Null told me about some ill-informed people, and so I should mention here what is essentially  the program to open bank accounts for every household in India.

One of the reasons for this program is to end market subsidies for essential items that instead feed the black market, and instead to deposit money directly into the bank accounts of the people who need those subsidies.

Of course, the ability to create bank accounts depends on a previous project, the one to give national identity cards to everyone.

About how to open a bank account: read here.

About the political impact of demonetization in India:

BJP has emerged with flying colours from the first electoral test since Prime Minister Modi’s demonetization drive was launched on November 8 this year. In civic elections in Maharashtra, which BJP and Shiv Sena, (partners in the state’s ruling alliance) fought separately, BJP won 51 mayorships, Shiv Sena came second with 25, followed by Congress with 23 and Sharad Pawar’s NCP got only 18. In Gujarat, BJP swept the civic elections yet again winning 107 out of 123 councils. The results have obviously dampened the spirits of opposition parties in the two western States as they had hoped the travails of “note bandi” or cash crunch in the wake of the ban on Rs. 1,000 and Rs. 500 currency notes would antagonize voters against Mr Modi’s party.

Significantly, the BJP also scored big in by-elections in West Bengal and Madhya Pradesh. In the latter, it retained its seats albeit with a reduced majority in the Shahdol Lok Sabha constituency. In West Bengal, where the party’s influence is rather limited, it registered a huge jump in the Cooch Behar parliamentary seat, securing 28 percent of the total votes, up from 12 percent that it got in 2014. Quite clearly, queues outside bank branches and ATM counters, difficulties being faced by ordinary people — from farmers’ inability to buy seeds in the sowing season to arranging weddings in the family — have not metamorphosed into electoral anger. From all accounts, Narendra Modi’s popularity not only remains undiminished but may have even gone up by a few percentage points.
About the short-term economic impact -  Indian banks had accumulated a portfolio of bad loans under the previous government, and their need to keep a suitable capital ratio greatly constrained the availability of credit, and India's 7.x% growth rate was achieved against that headwind. Demonetization has given the banks huge new deposits and their capital ratios have greatly improved.

In the longer term, I think the stronger of the incentives for "black" money will have to be reformed away, and the rest of the tax evasion will have to be limited by stronger enforcement.

PS: I knew long ago that not reading Tyler Cowen was a good idea, a big savings of time.