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Demonetisation has pushed the country into recession: Economist

24 Jan 2017 07:01 PM, IST

Demonetisation has pushed the country into recession: Economist
Prof. Arun Kumar

Mumtaz Alam and Ghazanfar Abbas, IndiaTomorrow.net,

New Delhi, Jan 24: "The demonetisation has affected investment in the country. It has increased unemployment and production has come down. These three are called recessionary conditions," said eminent economist Prof Arun Kumar while speaking at a program earlier this week.


He said the stated objectives - check on black money, fake currency and terror financing -- behind demonetisation have not been achieved.


Black Money

"Our wealth is a set of portfolios in which cash occupies only 1% space. Even in black wealth, there is just 1% cash. There is black economy of Rs 93 lakh crore and if it generated wealth in the last 30-40 years three times -- that is Rs 300 lakh crore and only Rs 3 lakh crore of it was cash. This demonetisation was to attack this small amount that is just 1% of the black wealth and there was no attack on the rest 99% and it has not affected generation of black income either. So this demonetisation had no link with black economy," said Prof. Kumar, former faculty of Jawaharlal Nehru University while delivering a lecture on Demonetisation and Its Impacts, organized by Jamaat-e-Islami Hind here on Saturday.


Fake Currency

"The government said demonetisation would check counterfeit currency which the government said is aplenty in the country. As per RBI, it is around Rs 400 crore. Where does this amount stand compared to the genuine currency of Rs 17.5 lakh crore? How can the government affect the huge genuine currency to check the small amount of fake currency? This was also a weak point," he said.


Terror Financing

"Then they said counterfeit currency is used in terrorism and so this demonetisation will hit terror financing. But the question is that if you make fake currency and put it in the market you get finance once and you can't get any more benefit when that note goes in circulation in the market. Once fake currency is in the market, it does not help terror financing constantly. It does when you regularly print fake currency. And to check it you have to stop the printing of fake currency," said he.


Confusion in policy behind demonetisation

"As long as currency is there, it is available to both white economy and black economy. If you print new notes, they will go in circulation in both sections."


Prof. Kumar asked that when as per government people were using Rs 1000 notes to horde black money, then how will the Rs 2000 note stop it now?


"And you printed Rs 2000 notes. When you said that Rs 1000 note is big and helps people horde black money then with the new high denomination currency you have made the same job easier," he said.   


"So there is a big confusion in the policy behind the demonetisation. It does not appear that they wanted to control black money or counterfeit currency or terror financing. These were three stated objectives that PM Modi made in his speech when he announced demonetisation on 8 Nov 2016," said Prof. Kumar.


Impacts of Demonetisation

Prof. Kumar said that thanks to demonetisation, a period of recession has begun in our country.

"Our economy has two important parts. One is organized sector and another is unorganized sector. While unorganized sector has 94% employment and organized sector has just 6% employment. The note ban affected the unorganized sector first. As the cash got shortaged the sector was unable to purchase raw materials and to pay salaries to employees and so it was shut down. And the effect on unorganized sector also affected the organized sector. Our economy was already in trouble and it was growing by just 1% for the last one and half years. The capacity utilization was 75% and with sudden move of demonetisation it came down to 50%. And in that situation you can't invest more."


"So demonetisation affected investment also. It increased unemployment. Production came down. And investment came down. These three are called recessionary conditions."


Citing findings of some surveys, he said demonetisation has hugely affected demand and supply.


"SBI conducted a survey between 1-4 Jan this year in Pune and Mumbai. It found that businesses in the industrial hub noticed demand was affected by 40% and so was their profitability. Similarly Delhi Chamber of Commerce conducted a survey in Punjab and Haryana. Around 88% of the 700 small and medium enterprises surveyed said their demand has decreased. All India Manufacturers Association also conducted survey and found decrease in demand."


"Demonetisation has affected farming sector also. Farmers who had taken loan won't be able to repay the amount now. And if they didn't repay the old loan then they won't be able to take fresh loan for new crops. This all shows that recession in our economy has begun and we can't overcome the period of recession easily," said Prof. Kumar.

Demonetisation never done this way in the world

Prof. Kumar said that the way this demonetisation was done is unprecedented.


"Before this demonetisation (8 Nov 2016), notes were changed in 1948 and 1978. In 1978, notes of Rs 1000, 5000 and 10000 were withdrawn from market after issuing an ordinance. At that time, those notes had total value of Rs 165 crore - that was 0.60% of the total currency at that time. But this time, the government has withdrawn about 86% of the total currency," he said.


"This type of demonetisation has never been done in any country of the world before. In Euro zone, the currency of entire Europe was changed into Euro but for this they took three years for preparation. After the fall of Soviet Union, Russia changed its currency as one dollar became equivalent to 60,000 rubles while before the fall, both currencies had equal value. Today in Venezuela, one has to carry bag of currency notes to purchase daily items as the currency has collapsed there."


"Demonetisation takes place where currency collapses. It is not done in a place where economy is normally functioning as in our country but still it has been done here," he said.

Keywords : Demonetisation ,   recession ,   RBI ,   Prof. Arun Kumar ,   Indian Economy  

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