Demonetization: Arun Kumar

Economics professor Arun Kumar

is one of the most widely quoted authors on black money

• Demonetization as a tool for economic surgery has been used in Soviet Union or Weimar Republic when currency has totally lost its value. There the currency was abolished and new currency created. But India is not in that situation.
• Our macro-economic indicators were reasonably good. The real point is, what does this move achieve?  PM Modi said, the objectives are curbing terrorist financing & counterfeit currency and eliminating menace of black economy is the source of poverty and all the problems in India.
• Counterfeit notes are only 400 per million, which is very tiny. And according to RBI, there is only Rs 400 crore worth of counterfeit currency. In currency in circulation of Rs 17.5 lakh crore, fake notes are less than 0.028%.
• Terrorists need financing. So they have to print more and more money. Demonetization can not stop fake note printing in Pakistan. They can counterfeit the new currency notes also.
• Black income, black money and black wealth, all three are different. Wealth is held as a portfolio, real estate gold, share market or cash. Cash is only one component of your wealth, possibly one per cent of your wealth. The black economy, which, according to my estimate is 62 percent of GDP, for the current GDP of Rs.150 lakh crore, we are generating Rs.93 lakh crore this year as black income. Black wealth could be three times more so about Rs.300 lakh crore. Out of that, Rs.3 lakh crore would be held as cash which we can call black money.
• Will you be able to eliminate even rupees three lakh crore?
  - On the day this announcement was made, jewelry shops were reported to be open till 3 am, issuing backdated receipts for purchase of gold, etc.
  - One builder gave several months’ advance salary, totaling Rs.240,000 to all his workers.
  - Jan Dhan Yojana is being used in large amount in rural areas. The landlord gave 100 people to take Rs 250,000 each from him, deposit, and return it to him later with a cut of Rs.25,000 or so.
• So you won’t be able to demobilize even Rs. 3 lakh crore, at best you may demobilize Rs 50,000 to Rs 70,000 crores. Within less than a year, black income generation will continue as before. Say, by selling spurious drugs, narcotic drugs, charging capitation fee, under-invoicing and over-invoicing in business and trade and so on. Introducing Rs 2,000 notes, storage of black will be even more easy. The logic that large denomination currency is used to stash black money so it needs to be demonetized is self defeating.
• Black money is not a parallel economy. Black economy and white economy are largely intertwined in India. So when you sell your real estate property you generate black and white income simultaneously. When you produce sugar, you don’t show 10 percent and show 90 percent of the output. That’s why when the black economy is affected the white economy is also affected. This move, which is supposed to impact the black economy, is affecting the white economy terribly. Demand is going down.
• If you take out 85 percent blood from somebody’s body and then put five percent into it, what will happen to that person? He will die. Similarly, when you take out 85 percent liquidity from the economy and slowly replace it by five percent, then the circulation of income goes down. Footfalls in malls are falling, charging of mobile phones is declining, the balloon seller is not able to sell balloons, the small trader is not able to sell goods. All consumption is deferred and circulation of income is slowing down, leading to a decrease in demand. When demand slows down, production slows down, employment drops and investment falls. And when investment falls it will have long-term consequences. If this goes on for a month or two, investment will decline and, the impact will persist for more than a year. 
• According to Business Standard, it will take 108 days to replace the old currency, provided there is no shortage of ink or paper. And if you are printing Rs 100 notes, then you need to print 10 times more notes than for a Rs 1,000 note and that will take a lot more time.
• People are hoarding currency because they are not sure when the supply will be normalized. As a result, the demand for currency will be 50 percent more. The people who will suffer the most are those in the unorganized sector, as they don’t have credit or debit cards. They are the ones who need more currency in circulation. The entire agriculture is unorganized sector. This sector is also a major component of manufacturing and services.
• There the danger of a huge chunk of people being left “economically disabled” for a long time to come? With money you buy food, clothes and services. So money is for circulation. It keeps everything going. If there is a shortage of that then there is a problem.
• The real pain for the poor is already on. Real pain for the middle classes is less because we can use credit cards, etc. When production slows then middle class people will face lay off. And they will begin to feel the pain. If the government had prepared properly and managed to create enough supply of new currency then possibly this pain would have been less.
• Coming to options, this move does not sort out the black economy but creates problems for the whole economy. The point is that black economy has not been created yesterday. It has been growing for 70 years. So this problem can’t be solved overnight. There is no magic wand. What you could have done immediately is to appoint a Lokpal to bring about accountability in the system. Businessmen, politicians, bureaucrats, police and judiciary are not accountable. So how do you bring about accountability? If you can bring about accountability of these sections then you can solve the problem of black money. So RTI and Whistleblowers are very important because they are the ones who expose the scams. Strengthen them.
• You could have targeted the 3% of people who indulge in black money without adversely affecting the 97% not generating black incomes. In fact, 97% are already the sufferers due to the black economy and now another burden is placed on them, without solving the problem of the black.
• The Income Declaration Scheme (IDS) was there till Sep 30, wherein you could disclose the black amount for 15 percent penalty. The FM said: “Please come clean, then you can sleep in peace.” But as long as you say we will not take steps against the corrupt businessman he is happy. So wherever amnesty has been given that has not worked.
• Voluntary disclosure scheme (VDS) has been implemented six times in India. The government gave an undertaking in the Supreme Court in 1997 that we will not have this scheme ever again, the reason being that it’s unfair to the honest person. The honest businessman’s capital is rising slowly because he is paying full tax. The dishonest businessman’s capital is rising fast. So the honest one says let me also become dishonest. 
• People have become habitual tax offenders. Those who declared in the earlier five schemes also declared in the sixth scheme. They think another scheme will come, let me generate more black income today. 
• The Mauritius route is also like a VDS. You take the money out, bring it back through round tripping and so you don’t pay tax. So the system has created these easy ways of generating black income. We have wonderful laws. But we don’t implement them. Political will is needed to implement laws.
• Bulk of the cash is white which has to be used for circulating the economy. As to households, an ordinary peon generating Rs 10,000-20,000 of black is nothing compared to the size of the black economy. One Madhu Koda generating Rs 6,000 crore of black is more than the entire black income generated by all class C and D employees. The misnomer is that black economy means cash. That is where the understanding of Modi is lacking. He thought that if he demobilizes the cash the black economy will collapse.
• The political ideology is that I will be the hero of the poor, that I have eliminated the black economy that was affecting the poor. What he might do if that Rs 2 lakh crore doesn’t come back is to say I am giving 10 crore families Rs 20,000 each. These rich people had stolen this amount, so I have taken it back from them and distributed it to the poor. But it can fall flat because they may get Rs 20,000 one shot and if they lose their employment, they will lose far more over the year. 
• The trading community will desert him as far as I can tell, because traders are very upset. Farmers are upset, workers are upset. What they will do is to restore money supply to Delhi, Mumbai, Kolkata and Chennai so that the national press says the queues are dwindling. But there will be little money in villages. And there’s little money in Tier-2 and Tier-3 towns.
• They will not go after lockers, that will affect only the middle class. The poor doesn’t use lockers.
• If you have the political will to do this you should also have had the political will to do that. Like, a UP leader is reported to have told funders to take back old notes and give new notes. So, political funding won’t stop. Now it will be easier with Rs 2,000 notes. They won’t be harmed. A commissioner said we don’t touch those cases where we know there is political backing. Anyway, Income Tax department doesn’t have the capability to handle so many cases. 
• It’s just one man’s mind at work. He just didn’t consult anyone. In his address he said that the departments of government and bankers are hearing this for the first time. 
• He is taking away livelihoods. That’s the consequence of this move. It’s a legal tender saying “I promise to pay” and government is paying with new currency—of equal value. But it creates recession. It’s a foolish step. Any policy can go wrong. 
• The SC can condemn you for the process. The SC is a responsible institution. It can say anything orally, scold, but when it comes to judgment it is circumspect. PIL's have been filed and government wants them consolidated in the Supreme Court but the court has refused that till now. But ultimately it is quite likely that the court will say it’s a policy issue and therefore we can’t do anything. 
• One man is trying to deliver on something that is undeliverable, against the advice of everybody else. That’s not how you run such a complex country like India. If I were there I would have asked 100 people. He didn’t trust his own cabinet and took away their mobiles and confined them to a hall till 8 pm. Urjit Patel called all bankers and told them to watch an important announcement. This is absolutely not the way to make such a complex policy in a complex country like India.