On 8 November 2016, in an unexpected late-evening message on television, Prime Minister Narendra Modi announced the government’s decision to pull notes of theRs1,000 and Rs 500 denominations from circulation. The aim of this demonetisation, he said, was to “fight against corruption, black money, fake notes and terrorism.” Arun Kumar, an eminent economist who formerly taught at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, has been amongst the strongest critics of the move. Kumar noted that the move would not tackle the issue of black money, as it does not impede the generation of black income. On 10 November, Kedar Nagarajan, a web reporter at The Caravan, met the economist to discuss the outcomes of the policy decision. Kumar discussed the scheme’s impact on economic growth, employment and on the shift towards a cashless economy.
Kedar Nagarajan: What has been the broad impact of demonetisation on the economy?
Arun Kumar: It has not fulfilled the three promises it was supposed to have, which were to tackle the black economy, counterfeit currency and terrorism. None of those have been affected because, as I have said, the black economy comprises two parts: black income and black wealth.
In the case of black wealth, there’s a portfolio of assets, and cash is less than 1 percent of the portfolio of assets. It could not tackle even 1 percent of the black wealth because nearly 99 percent of the cash has come back [according to the Reserve Bank of India’s annual report]. As far as black income is concerned, demonetisation is not designed to tackle the process by which black income is generated. In other words, the black economy has not been impacted by demonetisation.
Its main impact has been on the white economy, which consists of the organised and the unorganised sector. The organised sector can work with credit cards, debit cards and mobile transfers, but the unorganised sector relies entirely on cash. We must realise that cash is not something that we consume, but it is what we use to ensure the circulation of incomes. When transactions do not take place, incomes stop. It is the unorganised sector—which is 45 percent of the GDP and [along with the self-employed sector] 93 percent of the country’s workforce—that was impacted negatively. This also impacts the organised sector. The discretionary demand in the organised sector got postponed. The impact of this was that the capacity utilisation [the extent to which an economy employs its productive capacity] in the organised sector went down. When that happens, investment declines as well. This has a long-term impact. What was marketed as a short-term inconvenience actually has a long-term impact due to the decline in demand, decline in investment and decline in the growth rate. It got converted into a recessionary type phase. Because the demand fell, especially in the unorganised sector, this fall in demand meant capacity utilisation went down. RBI data shows that capacity utilisation has been hovering between 70–75 percent, which is very low. Investment declined, and that leads to a long-term slowdown in growth, because investment is what propels growth. Employment went down, that’s why demand went down.