Arun Kumar’s book “Demonetisation and Black Economy” talks about the futility of such an exercise which brought no gains but caused massive pains.
“We have decided that 500 rupee and 1000 rupee currency notes currently in use will no longer be legal tender from midnight that is 08 November, 2018…….”
Thus went the momentous announcement by Prime Minister Narendra Modi, dealing a huge shock to entire economy by derecognizing about 86 per cent of country’s currency in one stroke at four hours notice. This step was historically unprecedented in terms of its scale and impact. This critical decision was taken with the purpose of fighting black money, corruption, counterfeit currency and terrorism, with the fond hope that it will ultimately clean up the entire system. It caught the people unawares. From serpentine queues at ATMs to prime time channels and at parliament, demonetization became the most fiercely debated topic.
Professor Arun Kumar’s “Demonetization and the black economy”, a 300-page book, wrapped over nine chapters, has come out a year later when the dust has somewhat settled and it attempts to make an incisive enquiry into black economy and the goals, impact and socio-economic and political aspects of demonetization. Professor Kumar is an authority on black economy and has done extensive research and writing on it. He questions the rationale of demonetization in a well-functioning economy and shares the popular opinion amongst the academicians that it has turned out to be a test case of ‘what not to do’.
With his years of experience in academics, he analyses various aspects of black economy relevant to demonetization. He deftly deals with issues related to nomenclature, misconceptions regarding the relationship between black money and black economy, and corruption and black economy. His principal argument is that all cash is not black and all black is not always in cash. ’Black means cash’ is a popular fallacy and the government, despite the best counsel at its disposal , too fell for it. Unless the processes responsible for generation of black incomes are eliminated, no significant dent can be made to black economy.
Since same cash keeps flowing between black and white segments, measuring the extent of black economy becomes difficult. Kumar goes on to add that cash held by the public is actually only a miniscule part of overall black wealth or the black incomes generated annually. He also points out that much against the public perception, the black money lying abroad is only a small fraction of the total. Just 10 per cent of the total black income generated annually find their way out of the country, out of which some part is again round-tripped back to India through investment channels.
This observation is significant when viewed against the backdrop of BJP’s promise of 2014 general elections to bring back all the black money stashed away in foreign coffers and giving each Indian family 15 lakh rupees! This is a promise that no government can possibly fulfill, as we do not even have a correct estimate of how much black wealth, in what forms and where, is lying abroad. Linking demonetization to this electoral promise, Professor Kumar terms the former a political masterstroke with little economic logic ,which helped the ruling dispensation to correct its image of being pro-corporate and anti-poor by harping constantly on black money and emphasizing that ‘nation’s wealth must benefit the poor’. Squeezing out 86 per cent of the currency in circulation and thus leaving the economy cash-starved for months altogether was certainly not the best way to achieve this noble goal.
From the perspective of academic analysis, Black economy falls under the purview of what we call Political economy. The author delves deep into the interlinkages of black economy, politics and policy failure and holds the opinion that the issue of black money is systemic and systematic with state apparatus acting as a facilitator. It calls for a complete restructuring of economic and financial infrastructure, making the systems more accountable and dismantling the triad between corrupt politicians, businessmen and the executives. The problem of black money has no quick fix solution and sporadic attempts, howsoever strong, cannot bring permanent corrections.
While dealing with short-term impact of demonetization, Professor Kumar focuses on already much discussed issues of lack of preparedness and logistical failures in executing this decision. Since 99 per cent of large denomination note came back to the banks, it could not unearth any significant proportion of black wealth. The same applies to counterfeit currency which was in any case only 0.02 per cent of the currency in circulation on 08 November 2016, that is about 18 lakh crores. The author argues that though the problem of counterfeiting of currency is serious, still jeopardizing the entire economy and putting people to immense hardships can never be justified. To top it all, soon counterfeits of new 2000 rupee notes started circulating. Likewise, the hope that demonetization of large denomination notes would silence the guns from across the border and stone-pelters in J&K, too, did not materialize.
Chapter 7 deals with social impact of demonetization where the author deals at length with its impact on institutions like RBI and commercial banks. The entire exercise has made RBI cut a sorry figure for itself due to lack of preparedness and logistical failures. As per the statement given by its Governor Urijit Patel before the Parliamentary standing committee on finance, RBI board was consulted only a day prior to announcement to consider the matter. Kumar argues that if RBI gave its concurrence to this decision without fully comprehending and thoroughly considering the matter, then it does not speak well of a hallowed institution like RBI.
The process of remonetization was slow which put huge pressure on banks and ATMs, where people thronged, only to go back home, mostly empty handed as there was never enough cash to meet the public demand. The author also shares the opinions of other economists that demonetization has impacted both organized and unorganized sectors with the latter being hit the hardest as it conducts most of its business in cash. The sector collapsed soon after demonetization. Kumar has concluded that the exercise has increased the already existing divide between organized and unorganized sector and it goes against the avowed objective of inclusive growth.
For the common reader, the book is easy to understand and provides useful insight on the subject. It is a decent read, though the book leaves much to be desired in its analysis of the Macroeconomic costs of demonetization. The reader wishes that the text was better organized and structured. Likewise, there are just too many repetitions which the copy editor should have taken note of. Sometimes there are fleeting references to points which should have been dealt with more intensively. Overall the book will be useful for the layman as well as student of the subject.
Dr Sadhana Singh is Principal and Associate Professor (Economics), Dayanand Girls Postgraduate College, Kanpur, Uttar Pradesh. ‘Demonetization and Black Economy by Arun Kumar’ has been published by Penguin Random House India.
Unfortunately for both the professors and sundry critics of demonetisation, the ordinary people, for whom their collective hearts best, have decided to support this move of th
Unfortunately for both the professors and other sundry critics of demonetisation, the ordinary people for whom their collective hearts beat, have supported this radical move by the NDA government. They see it as an honest action after decades of stupefying inaction and outright encouragement by the Congress governments in the past. The critics are just not getting it and are getting angrier because the masses are refusing to know tow to the intellectuals.
Heck, the courage demonetisation took could have seen through privatisation of the banks, with a side order of labour reforms. No gain without pain, but there can sometimes be a lot of pain without any gain.