Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Wed, 16 Nov 2016

Why not a helicopter drop of new rupee notes?

A helicopter drop of new currency notes might be the perfect solution to the logistic problems arising out of last week’s demonetization of most of the Indian currency. The pressing logistical problems are about getting the new notes to the remote and under banked rural areas of the country. There is also a concern about solving the problems of the poor who were more reliant on currency than the rich, and have less access to credit which can substitute for cash. The simplest solution is to simply drop currency notes from the sky across the length and breadth of the country so that every Indian receives some money to carry on their daily activities without worry.

There is a strong fiscal justification for this free gift of money to every Indian. The whole purpose of the demonetization exercise is to destroy the stock of unaccounted holdings of currency in India. If we assume that 40% of the 14 trillion rupees of the old notes represent untaxed income and will not therefore be exchanged for new notes, there is a gain of over 5 trillion rupees which amounts to about 4,000 rupees for every man, woman and child in India. A helicopter drop of this magnitude would simply be a way distributing this windfall gain equally to the people of India in a kind of negative poll tax. The alternative to this equal distribution would be a reduction in the income tax rate or the GST rate which would distribute the benefits more to the rich than to the poor. In fact, the costs of demonetization are falling equally on the rich and the poor. The poor man stands in the queue for the same few hours to get his 1,000 rupees as the rich man does to get his 24,000. There is therefore every reason to spread the benefits also equally among all.

In addition, there are huge logistic benefits from a helicopter drop. It gets money directly in the hands of those who need it most without wasting their time. Farmers can spend their time harvesting the crop instead of standing in queues in a far away branch. Urban poor do not have to forsake their daily wages to go to the bank. This also ensures minimal disruption to economic activities. In fact, demonetization could become so popular among the common people that we would be able to demonetize our currency every 5-10 years instead of doing it only once in 30-40 years.

Helicopter drops of money are a well established tool in economic theory. The Nobel laureate, Milton Friedman was perhaps the first person to discuss the idea his 1969 paper on The Optimal Quantity of Money. The greatest living exponent of helicopter drops is former Fed Chairman, Ben Bernanke who endorsed the idea in his 2002 speech on deflation and has apparently been advising Japanese Prime Minister Shinzo Abe to try it. It is quite likely that apart from solving the logistics problems of demonetization, the helicopter money drop would also stimulate the economy at a time when it is facing several headwinds. It would certainly do more to increase rural spending than rate cuts by the central bank which seem to get lost in monetary transmission.

Economists are more willing to contemplate bold ideas, while politicians and bureaucrats tend to be cowardly in their approach. In India, today, we have the perfect constellation of factors that make a helicopter drop economically sensible and politically feasible. If a bill were to be moved in parliament to provide statutory basis for a helicopter drop, I am confident that almost all MPs who want to be reelected in 2019 will support the bill and it would be passed by an overwhelming majority.

In my dreams, the Indian government invites Ben Bernanke to advise it on the helicopter drop and also lets him ride the chopper on its first flight and drop the first wad of new notes with his own hands. It also invites Japanese prime minister Shinzo Abe to witness the inauguration of this programme. Today, Japanese tourists come to India to visit the holy sites of Buddhism. Perhaps, future generations of Japanese will come to India to visit the parliament which pioneered the first helicopter drop that was emulated in Japan and eventually lifted that country out of deflation. It is all a dream, but it could well become reality if the Indian government is willing to be bold and imaginative.

Posted at 11:31 on Wed, 16 Nov 2016     7 comments     permanent link

Comments...

Tarang Mehta wrote on Wed, 16 Nov 2016 14:41

Re: Why not a helicopter drop of new rupee notes?

Great Idea Sir!!! I hope someone from the govt is paying attention.

shamanth bhargav wrote on Wed, 16 Nov 2016 21:32

Re: Why not a helicopter drop of new rupee notes?

Sir, as quoted by you "If a bill were to be moved in parliament to provide statutory basis for a helicopter drop, I am confident that almost all MPs who want to be reelected in 2019 will support the bill and it would be passed by an overwhelming majority". Will this concept be efficient as this way of distribution cannot make sure of proper money distribution, even though it is for a temporary basis.

Mitul SJ wrote on Thu, 17 Nov 2016 12:46

Re: Why not a helicopter drop of new rupee notes?

The thing is they had already placed the Jan dhan yojana earlier they would have thought of it, those who have accounts will be paid cash (assuming most of the rural folks opened accounts for that), but it seems they don't have that plan of action. As they want to see the funds coming in instead of going out. The steps taken are clearly visible what the intentions are of the Govt. and highly doubting that if that approach taken, will create another storm from Opposition that Govt. gave cash-for-vote. That would raise the eyebrows as "openly giving cash" and can be misunderstood.

Will it affect the rupee? yes! the rupee is down so are the bonds and equity indices, VIX is increasing....even without giving cash. Also, that strategy is applied when growth is low and interest rates are also low compared to history they have gone down with. I do not think that would be possible to undertake. And if it happens I am not sure of the aftereffects of it on India, as a basket case, given how politics work like a boiling pot. The countries which have taken that approach are countries which are moving ahead slower than snail! So yeah that's the case. There are excess notes in the market more than printed so that's the case for fake currency in the market they want all in. If it ever showed up!!

The reasons are justified and are good considering, "if" there are/is "pure intentions" of the involved powers to do the task and other people involved in completing the process from the bank/post teller to the senior person in the bank/post and others who are in charged/responsible. As investors are not only watching the poor but everything given how things are unfolding. Everything is valued afterall. From speeches to agonies! when it comes to financial markets

Thanks for the article, Prof!

....there are no solutions only trade-offs ~ Thomas Sowell, American Economist