On November 23rd Madras Institute of Development Studies (MIDS) convened a seminar on the issue of demonetization. Several leading economists who attended the seminar criticized the demonetization policy, and said that it has unleashed hardship on the working class of India under the pretext of curbing black money. The economists explained how the objectives and the mechanisms of the implementation have been obscure and are more sensationalist than rational and the human cost of the policy especially on the working class and small and medium traders are to be condemned. Some of the economists in the seminar were Venkatesh B. Atherya, Prof. S. Subramanian, Prof. S. Janakarajan (MIDS) and Prof. Jothi Sivagnanam (Head, Department of Economics, University of Madras). Their discussions on the objective, mechanism, impact and the political context of demonetization are compiled below.
India’s black economy is estimated to be Rs 30 lakh crores, out of which an estimated Rs 7.75 lakh crores is in circulation. Hence the current demonetization is not going to eradicate black money, as all black money is not stored in cash. Instead black money is stored as assets in and outside of India.
Black money goes out of India and comes back as FDI. Hence what is needed to be tackled is black economy and not black money.
There are several agencies including Income tax department, anti-corruption agencies, and several laws to prevent corruption in this country. What is needed is effective implementation of these laws.
In 1978, a similar exercise was carried out when high denomination notes were withdrawn from circulation. But the percentage of currency withdrawn was 1%, and hence did not affect trade. In the current scenario, 500 and 1000 rupee notes constituted 14 lakh crore rupees out of the 16 lakh rupees in circulation. Hence the demonetization move announced on November 8th 2016 pulled out 86% of currency from circulation.
India has an average of 10.7 bank branches and 16 ATMs per a population of 1 lakh people. Urban areas and southern states have a higher concentration of banks and ATMs, and hence, rural areas and northern states are affected much more adversely by demonetization.
The problem is accentuated by the government bringing in Rs 2000 as the replacement currency. There is not enough Rs 100 in the market to transact in Rs 2000s.
In the hours following the announcement of demonetization (i.e. between 8PM of November 8th and 4AM of November 9th), there was an unprecedented amount of transactions in the bullion market. Gold price increased substantially and foreign currencies were sold at exorbitant rates. Demonetization has also created a black market for currency of small denomination. Those who wanted to convert their black money and had access, found ways to solve this by converting their cash to assets within 8 hours.
Measures such as demonetization, if adopted, have to be executed in a carefully calibrated way. For example, if less notes are printed, there is destruction of wealth and if more notes are printed, there will be deflation. RBI and Finance Ministry have been silent in this whole process. Their roles are being undermined through this silence and the sensationalism of Prime Minister.
Between November 8th and now, over 5.45 lakh crore rupees have been deposited and 1.03 lakh crore rupees have been taken out. The balance of over 4 lakh crore rupees is with the bank, and is out of circulation.
The process of demonetization has had a uge human and economic cost. People have died in queues. People have not been able to access food, medical care, and livelihood, and there have been scores of deaths. If the justification of this move is to create a better India, we need to ask for whom is India ‘better’?
The demonetization move has demoralized farmers, as they are not able to bring harvests to markets due to lack of money. Produces are being dumped in wholesale markets (like Koyambedu in Chennai). Farmers are facing difficulty in getting access to credit and seeds for next season. In the short term, there will be a sharp reduction in demand and in the medium term, there will be a sharp reduction in supply. This is becoming a question of survival for farmers.
The informal sector of the Indian economy deals almost exclusively in cash, and is heavily impacted. The informal economy comprises of sectors such as agriculture, construction and fisheries, and employs 90% of the total number of workers in the country (the total workforce is around 51 crores).
Informal sector workers have not been paid their wages because of demonetization. There are reports of big builders starting mass kitchen to feed their workers, but it is not clear how long this can go on. Rag pickers in ECR have been forced into a desperate situation as there is no money for their trade.
There has been no estimate on the loss of productivity due to people standing in queues.
The country is already facing huge economic problems: Trade has already stagnated, public expenditure has lowered, tax to GDP ratio is very low due to concessions to capital and now through this measure, consumption expenditure is being squeezed.
Dispossession of currency will not transform an economy into a cashless one, as the necessary infrastructure is absent. Instead, now we have cashless banks and cashless ATM, and not a cashless economy.
The unaccounted economy has to be examined in the context of alleviation of poverty and inequality. Today, the unaccounted economy(cash based economy) accounts for 77% of GDP. Several economists and policy analysts(For more information, see Ideas for India website), have started talking about universal basic income for all citizens to the tune of Rs 6000 per month. This is not discussed as a replacement of existing poverty alleviation measures such as PDS but as a supplemental measure. To provide a universal basic income of Rs 6000 per month, the Government would need 10% of GDP which would be equivalent to bringing 33% of parallel economy into taxed economy. Without taking measures such as universal basic income for alleviation of poverty, if the Government goes about bringing the unaccounted economy into taxation, it would impact the poor who are relying on the unaccounted economy.
The exercise has only ensured that black money is transferred from one set of defaulters to a new set of black money operators who have emerged in response to demonetization, and in some cases there is an overlap between the two sets. The whole exercise is like a hostage ransom drama where all the hostages are shot to handle the crisis situation.
The intention of the government in terms of manner of announcement is very problematic. Both BJP and Congress have been extremely pro-corporate, and the unhealthy nexus between business and state has grown under the rule of both the parties. In 2014-15, the excise duty was estimated at Rs 2.29 lakh crores and in 15-16, it was estimated at Rs 2.87 lakh crores, but there has been a sharp decrease in personal tax and corporate tax. Such pro-corporate tax regimes are regressive measures in which the poor take the burden of maintaining the nation while the rich go free.
BJP has refused to declare the source of its funds but wants everyone to declare their money. The Government has also changed FCRA rules such that companies which were deemed foreign are considered domestic.
The Government is not interested in preventing activities that are generating black money.
An MLA of BJP has said that Modi’s electoral promise of creating a bank account for every one with a balance of Rs 15 lakhs distributed from black money appropriation was only a Election Jhumla (Gimmick) and is not to taken seriously.
The Modi Government has a dismal record in fulfilling its promises. It has a dismal record in employment creation. Instead of confronting these issues with economic measures, it is using other political activities such as Ghar Whapsi, Beef bank which are divisive tactics.
Those who oppose these measures are not engaged with constructively but branded as anti-national. Hence there is a mindset being created among people to police themselves.