“Industry, Trade To Be Disrupted”

Arun Kumar, an eminent economist, determinedly pursued the issue of the black economy, long before black money became the manifesto headline of the government. Kumar taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, Delhi, and, in 1989, had played a role in drafting VP Singh's election manifesto. The author of 'The Black Economy Of India', Kumar critically examines the standard explanations for the causes and consequences of black income generation and the methods suggested for curbing it.

What is your take on the recent demonetisation? Does it serve the main purpose of tackling black money or terrorist financing as they claim?
The main two purposes of demonetisation, as stated by the PM was to check the black income generation and to curb the terrorist financing. This move serves neither of them. When we talk of terrorist financing, once the counterfeit money is in circulation, it's no longer with the terrorists. Their purpose is served. Post that, the counterfeit currency circulating has no effect on the terrorism. The question is that the people, who could print the old currency notes, would be able to do so for the new 2,000 note as well. According to the reports, the 400 crore of counterfeit currency in circulation is mere 0.001% of the total 17 lakh crores. So they need to stop putting this as the main reason of demonetisation.

So what about the agenda of putting an end to the black money in the economy, by this move?
Now, black economy could be the main reason, but one must understand the difference between the income and the wealth. Our savings could be held in various forms out of which cash is a very tiny component. The black income saved in the form of cash would maybe just 1-2 per cent of the entire black money. So we have demobilised just that 1-2 per cent. The bigger worry is that this doesn't stop anyone from generating black money again! How does stopping cash stop someone from generating black money say in the form of spurious drugs or capitation fee in educational institutions, under-invoicing or over-invoicing in businesses or trade, declaration of real income etc? So black income generation doesn't stop by this move.

What is the point of using this instrument of demonetisation?
My personal take is that if it had solved the problem of black income generation, it would have been successful. But it doesn't affect black income generation at all. Therefore, if at one shot they are able to demonetise some cash, not black wealth, it doesn't serve the holistic purpose. Out of total currency in circulation of Rs 17 lakh crore, Rs 500 and 1000 notes accounts for 85 per cent, which comes out to be Rs 14 lakh crore. Out of this, Rs 2-3 lakh crore could be black cash, which is a very small amount.

So you are saying that it fails to serve its purpose and instead disrupts the economy?
This move will completely disrupt the Indian trade and industry. The uncertainty will postpone the discretionary expenditure. This brings fear of recession. As it is, the industry was growing at 1 per cent per annum with only 75 per cent capacity utilisation. With the demand and consumption falling with demonetisation, it would hit the investments, which was already not growing. Once the slowdown is gripped, it would have to face long term repercussions. Even if the currency is restored after 10 months, this downturn may take 2-3 years to work out.

But, a lot of rating agencies and experts have said that we are at a very comfortable cushion of 7.6 per cent GDP and would be able to sustain the same in 2017?
I don't know on what basis they are claiming that. The claim of more liquidity later in the market is false. The rate of interest would not matter if uncertainty is there. US's interest is zero from the last eight years and yet the investment hasn't picked up. It is uncertainty and demands that hold importance.

Do you think the government could have handled the situation in a more planned manner and avoided the whole chaos?
It is quite clear that no preparation was made. That is why there is a tremendous shortage of notes. We now have reports coming out about the shortage of ink and paper. The tenders floated would also take time. What you have printed for 14 years, you are trying to do the same in 3-4 months? Recalibrating the ATM machines for the new Rs 2,000 notes would take at least eight months, even at war footing. How are we then prepared? The banks need 20 crores a day and are getting just 20 lakhs. The government is badly trapped at this point. Now there is a demand by the Lok Sabha and Rajya Sabha that salary should be paid in cash. Now if everyone starts paying in cash, imagine the demand in the economy.

Does the introduction of Rs 2,000 note to curb black money effective?
The argument was to demonetise the higher denomination note to curb the bulk stacking of black money. But now they have introduced 2,000 rupee note, defeating their own logic.

The present government has initiated a number of measures to unearth black money. How do you evaluate them?
All of them have failed. That is why they are doing this. The IDS scheme got only 65,000 crore and cleverly this was an amnesty scheme, despite terming it the other way. The same people are depositing in the other 5 schemes including this one, making them habitual tax offenders. The deterrence is gone. The honest people are turning dishonest.

All the recent schemes of the government do not yield the results of checking the black economy. The black economy today is 62 per cent of the GDP i.e. Rs 93 lakh crore. The IDS did not even get 1 per cent of the black economy. This is even less than 1997 scheme. Neither you got the majority of people to declare, nor you got a substantial amount of black money.

The foreign money bill, CBI claimed at least $500 billion are lying abroad, we got only 4,000 crore, which is less than even a billion dollar. That was another failure. So whichever scheme the government has tried has been a failure. So now the govt is threatening the people to declare their money otherwise tomorrow you will be in trouble. Why threaten the entire population to tackle the 3 per cent.

What is the right course of action?
We need a greater political will and take the bull by its horn. The Lokpal Bill has been passed, but Lokpal is not there, Whistleblower bill has been diluted, RTI has no applicability to the parties. Similarly, the Hawala operations, banking secrecy and the slew of other measure need to be taken up which are not, under some pretext. The government during the Ramdev and Anna Hazare movement were quacking because it involved public awakening and pressure.

People are saying it's a bitter medicine but necessary. But it would have been the correct medicine if the disease was cured. You are not curing the disease and administering the bitter pill to the entire economy.