‘Demonetisation To Boost GDP In Long Run’

Eminent economist and NITI Aayog member Bibek Debroy tells BW Businessworld’s Suman K. Jha that post-demonetisation, there’s also a need to look at measures like electoral reforms.

Edited excerpts:

What are your views on demonetisation. Do you see it as an opportunity or more of a challenge?
There is a bit of both. But I don’t think one should look demonetisation as a single instrument. Demonetisation is a part and parcel of several other initiatives that this government has undertaken. It is a part of the overall picture.

I am flagging this because a lot of critics have said what it does to prevent creation of new black income. It’s not meant to prevent the creation of new black income. On 8 November, there was a finance ministry press release, which listed out the series of measures the government has taken to prevent the creation of new black income, and presumably there will be more announcements on the same. So let us not look at 8 November as a magic wand. Even by the government’s statements, this is meant to address the existing stock of black wealth, and not the creation of fresh black income.

Many economists differ on the definition of black economy. How would you define it?
There is no confusion, but my fraternity of economists are not careful when they bandy around words. Cash is not black and cannot be black. You will find several people quoting and many studies on black wealth in India. All these studies actually estimate the share of informal or unorganised sector in GDP. Informal or unorganised is not the same as black. So when you see figures saying 40 per cent … that is not black, that is informal/unorganised and there is nothing wrong or illegal about that.

The moment you use the word black, it has to have a notion of illegality associated with it. That could be in two different ways: First, which I call is Double Black, when the activity which is generating that income per se illegal that may be corruption, drugs, trafficking or some other crime, so the activity is black.

Second is Single Black, when the activity is not illegal, income is earned through a legitimate activity, but you have not paid taxes for it, then that is Singlr Black. So there are these two gradations of black. The last study on black money as opposed to informal or unorganised, in my view methodologically, is one carried out by the National Institute of Public Finance and Policy in the mid-80s. And I have not seen anything respectable after that.

In the long run, it’s being said demonetisation would boost the GDP…
It does. We need to talk about the numbers but your guesses are as good as mine. For example, I have got Rs 14 lakh crore of high value floating around of Rs 500 and Rs 1000. Out of which, about Rs 8 lakh crore is probably transaction related. So it comes into the system and goes out. So net nothing happens. Now, I am left with Rs 6 lakh crore. Out of that, perhaps about Rs 2 lakh crore is Single Black. So people have not paid their taxes. Now, that tax money comes in and this bit is clearly a transfer of resources from the rich to the poor and it is the money that comes in, into the hands, because that is the money of the government and can be used for spending on public good to benefit the poor.

There is a Rs 2 lakh crore that is Double Black. If that doesn’t come back, this is the currency that is destroyed. A lot of people are loosely talking about the government. Neither the RBI is strictly speaking, nor the public sector banks are strictly speaking about this. What that destruction does is reducing the RBI’s liabilities. Like the destruction of the Rs 2 lakh crore. It reduces RBI’s liabilities, but that is a capital account transaction and does not mean that the RBI can now pay greater dividends to the government. What it means is that the RBI can now invest more in government securities. So the money is coming to the government in a different way. Little bit of the money doesn’t come to the government or the RBI, but to the public sector banks, which eases their liquidity problem. So all these are different gradations in that.

What are the measures you think the government must take to complement its initiative?
This is no way a secret, the big issue in addressing any problem where black money or black wealth comes is the issue of how the elections are conducted and the issue of electoral funding or electoral reforms. There are small limited things which are associated with too much of discretion including land, etc. that’s part of the agenda in any case. I think, what demonetisation has done is the beginning to set the agenda for a discourse and debate on electoral reforms. I am not saying it is going to happen tomorrow because electoral reforms are a long drawn process. But at least it needs to enter the debate and the discourse.

Do you think there is a need for greater accountability as far as the political parties are concerned because we do not know who is contributing to political parties’ coffers.
I and a colleague named Kishore Desai have done a discussion paper on simultaneous election. You could find that on our Website, which is just meant to trigger the debate. Yes, there is a lack of transparency. There is a huge jigsaw, in bits and pieces but I don’t really see why all donations should not be in the form of cheque, why all political parties shouldn’t audit their accounts. And by all parties, I mean all. So yes, I agree with you.

suman@businessworld.in; @skjsumankjha