It has been ten months to demonetisation and yet there has not been much of an improvement in the Economy. International experts on economic affairs and economists have criticised the Modi government for the ‘misadventure' and have termed demonetisation a total failure. Steve Forbes, the Editor-in-chief of Forbes magazine, for instance, said that demonetisation was ‘sickening and immoral’ and that the move was a ‘massive theft of people’s property’. He compared the decision of the current PM to former Prime Minister Indira Gandhi’s infamous- sterilization program in the 1970s. The British firm stated that corruption in India is still endemic 10 months after demonetisation.
Back home, economists concede that benefits of the demonetisation were not significant in relation to cost. It has been established now that demonetisation was worse than it was thought to be.
Anju Grover for Indian Currents spoke to Surajit Mazumdar, Professor of Economics at JNU, to know why was demonetisation a total failure and why didn’t he agree with the government's argument that demonetisation was the only way to address the real problems of Economy. According to him, negligible black money was unearthed as the RBI data suggested that at least for the Rs 1,000 notes, almost 99 per cent of currency in circulation came back into the banking system.
IC: What is your assessment of the impact of demonetisation now that ten months have passed?
Surajit Mazumdar: The degree of failure of demonetisation is far greater that what could have been imagined even before the decision was taken. Before the decision was taken it was possible to ascertain that the benefits of this measure would never be very significant while the cost to the economy and to the people would be severe. So there was no jusitification for this move even before this measure was taken. Now we know even the limited gains that were thought to accrue from this particular measure, have not accrued. Most of the notes have actually come back.
IC: Some experts defend the government's demonetisation move saying that the benefits of demonetisation could not be achieved as per projections due to the fact that so many notifications came in those 60 days leaving people confused. Do you agree with them?
That's not true. The measure did not fail because of so many notifications as the success of the demonetisation move depended on catching people unaware. Therefore, the government kept changing the rules of the game to catch people unaware. Hence, they made it more difficult for those who had unaccounted incomes to hide by taking advantage of the situation. Repeated changes in the rules meant that the cost of measures was accentuated. It is not that the potential benefits came down because of the changes in rules. The net cost of this particular move was increased by the repeated changes in the rules.
IC: In its reply to the questions raised by the Parliamentary Standing Committee on Finance in mid-July, the Reserve Bank of India stated that it has "no information" regarding the amount of unaccounted or black money extinguished as a result of demonetisation. Your views.
The RBI is correct when it said that they don't know how much of black money has come back. The RBI would not be able to tell the source of income and amount deposited by the people. The RBI can tell the amount of money deposited in banks and through the banks returned to the RBI. Unfortunately, it has taken a long time to tell us even that. The question is: If the RBI had no way of assessing precisely what would be the effect of demonetisation on black money then what was the rational by which the RBI board made recommendation to the government.
IC: The RBI said that they are still counting the notes....
The RBI has been releasing data of quantum of currency in circulation every week. Therefore, when it said that it was still counting the notes, actually raises questions about the credibility of RBI. It also means that the RBI is raising questions about its own data. The RBI has become a winning instrument of a measure by the government that may have been taken for various political reasons. So, the RBI as an institution has been undermined.
IC: Your views on Ex RBI Governor Raghuram Rajan’s statement that he had expressed his reservation on demonetisation in February 2016 and suggested that alternative measures should be looked upon rather than demonetisation.
Economists are generally divided on policy decisions and provide different prescriptions depending on their own analysis. On demonetisation, the most striking feature was that most of economists across the board were critical of this particular policy decision. The former RBI Governor's statement reflects the same. The RBI as a public institution has some responsibility where it does not have to go by the diktats of the government. In case of release of information on how much money was returned, this was the public responsibility of RBI. It failed in its responsibility by succumbing to government's diktat. The RBI as an institution which generates and releases data on the economy has a statutory responsibility. The RBI failed in its responsibility to caution that it would not be appropriate.
IC: Many economists had deplored the demonetisation move and predicted that it will have ill effect on economic growth of the country. What is the current economic situation?
Now, we have some evidence to co-relate with demonetisation that there is an economic slowdown. But that may not capture everything because data collection system has not captured the information about informal sector in an extraordinary situation. The RBI data clearly indicated that compared to the fall in cash withdrawal through ATMs, increase in electronic payments was not of the same order as decline.
IC: The defence of demonetisation is that it will have long-term benefits. Do you agree?
I do not agree.
IC: How do you see Modi government's economic policy in the wake of demonetisation and GST?
I do not see any fundamental shift in the economic policy followed by the previous UPA government and Modi government. This government is certainly trying to politically manage certain measures which the earlier government may have wanted but could not manage.
IC: How do you view the current economic situation of the country?
The overall economic situation in any case, was not very good before the demonetisation. There are significant parts of the economy where you see high degree of sluggishness, problem of employment growth and stagnating investment. So, economy was not in great health no matter what the GDP figures may show. There were many reasons why economy was not doing well and the demonetisation added another reason for economy to not do well. The demonetisation was not the way to address the real problems of the economy.
IC: According to you, what are the ways to address the real problems of Indian economy?
Check evasion of taxes by the corporate sector is one of the important steps.
(Published on 11th September 2017, Volume XXIX, Issue 37)