What has happened in India has never happened before because demonetisation is usually done where the currency has collapsed as it was done in Russia and Venezuela. But in India, it was not the case.” This statement was made by renowned economist Prof Arun Kumar at a public meet on ‘Upcoming Budget: Expectation and Impact of Demonetisation’ organised by Jamaat-e-Islami Hind at its headquarters on 21 January.
In his opening remarks, he said that the magnitude of black money is huge which is 62 per cent of 150 lakh crore economies, viz. 93 lakh crore. And therefore its impact on our economy is going to be very negative. The question arises: will demonetisation control black money operating in the system and at the cost of what?
On the possible consequences of demonetisation, Prof Kumar said the consequences are the short, medium and long term. The demonetisation done in the past, in 1978 and 1948, had very little impact. The money taken out at that time was only 0.6 per cent of the total currency but this time it was 86 per cent.
While citing example, he clarified the impact on the whole economy, Prof Arun said, “It could be best understood by supposing if you take out 86 per cent of blood from the whole body and then put 5 per cent each time in it afterwards, what will happen to the whole body? It will collapse due to lack of oxygen. The same will happen in the case with our economy.”
He further elaborated by saying that money circulates in our economic system. Due to less circulation of money, transaction would be affected and due to which income generation would be also affected. It also affects our production, investment and our purchasing capacity. And with such prevailing situation economy will go down in recession.
In order to simplify it further, he said 17.5 lakh crore currencies were in circulation. Out of 17.5 lakh crore, 15.44 lakh crore rupees was in the form of Rs 1000 and Rs. 500 currency notes. Now, where was this 15.44 lakh crore? It is believed that 60 per cent was with the businessmen and 40 per cent in the household. The 60 per cent with the business was working capital and it remains in circulation. The money kept in houses is both black and white. The white money kept is for precautionary motive or transaction motive. The size of black money in houses would be around 3 lakh crore. Even in our total black wealth, there is only 1 per cent in cash. In 96 lakh crore of our black economy, it is estimated that out of 300 lakh crore only 3 lakh crore is in black cash.
According to him, there are basically two components of black money economy, income and wealth. The demonetisation has attacked this 3 lakh crore. By demonetisation, the government has attacked only one per cent of the black money and has not been able to curtail black income generation process. There has been 0.1 per cent effect on black wealth and no effect on black income generation process. Furthermore, demonetisation has also not controlled Black economy, counterfeit currency and terrorist financing. The stated objective of the government does not seem to have worked and has not been fulfilled through demonetisation.
While elaborating the impact of demonetisation on organised and unorganised sectors, he said, in unorganised sectors, there are 94 per cent employments and in the organised sector 6 per cent. The production in unorganised sector is 40 per cent and in the organised sector 60 per cent. The unorganised sector depends on cash. The impact on unorganised sector was huge and later on, as a result, it has impacted organised sector as well. Demand and production have declined; our discretionary demand has been postponed which has resulted in less profit and thereby less investment. Already our economy was in trouble which was moving at 1 per cent for the last one and year and a half.
“The capacity utilisation was 75 per cent which has after demonetisation decreased to 50 per cent which would negatively impact our investment. Therefore unemployment will increase, production will decline and investment will be affected. And these three conditions are called recessionary conditions. And it is not very easy to come out of it very soon. We have already seen global economic crisis during 2008-09. It took nearly five to six years for the economy to come out of the recession. It will at least take two to three years for India to come out of this recession. The reason would be shortage of money and it would continue for eight or nine months more,” Prof Kumar said.
As for its impact on the Budget, Prof Kumar said, for making budget it is important to know what happened in the current year and if this is not clear how you are going to make a budget. No exact figure has come out either from the government or from the RBI. The budget which we are going to have is most likely to be made on the basis of wrong or speculative figures. As the budget will be made keeping in mind the upcoming assembly elections in five states; so more sops are likely to be announced.
If they will spend more on the sops then the deficit will increase. If deficit will increase then Credit Rating Agencies will downgrade which will have a negative impact. And if you are not spending more on sops then the recession will further increase. We have to be aware that promises made by the government in the budget would be more of political nature. If the budget is not made on actual figures then the economic problem will further deepen. He also cautioned the government to have an eye on the recent development in the US while drafting our budget because when we are opening our economy, the US is trying to close their own.
Prof Arun Kumar, while replying to a question on psychological impact, told Radiance that people’s trust in the system have been affected; faith in the banking system and the credibility of RBI have also been affected and people may now try to keep money more in dollar.