‘Demonetisation Caused Untold Hardship’


One of India’s leading experts on the black economy, who has studied, written about and lectured extensively on the phenomenon for nearly four decades, has said that the demonetisation design is flawed, the objective has not been achieved and there is a very real danger of the shortage of currency translating into recessionary conditions as the economy continues to suffer….writes Saket Suman

 by . “While the objective of dealing with the black economy and terrorism has not been achieved, the economy is suffering. Any move to check the generation of black money should have been targeted at those who generate it without hitting others. It will not have any long-term impact on the black economy,” economist Arun Kumar, who taught at Delhi’s Jawaharlal Nehru University (JNU) from 1984 to 2015, said.

“Events in the last three months show that demonetisation cannot tackle the black economy since cash does not mean black. Hence, the design of the policy move is basically flawed. While the notes shortage will dissipate slowly in the coming months, the slowdown in the economy is not getting less. Thus, the problem is transforming from notes shortage to recessionary conditions in the economy,” said Arun Kumar, who played a role in drafting the Janata Party’s manifesto ahead of the 1989 Lok Sabha elections.

Arun Kumar’s book “Understanding the Black Economy and Black Money in India” (Aleph/Rs 399) argues that the Narendra Modi government’s sudden demonetisation of Rs 500 and 1,000 notes in November 2016 “failed to put a dent in the black economy but caused untold hardship” to hundreds of millions of Indians.

He said that cash is a stock and its removal, even temporarily, does not mean that the generation of black income by various devices will stop. “The black and the white economy are not parallel and the same currency circulates the black incomes as the white incomes; so any black cash demobilised would soon get regenerated,” contended the author, who was educated at Delhi University, Princeton University and JNU.

He, however, agreed that the government is trying to take supplementary steps but said that their impact has to be dealt with separately. “Moving towards a cashless economy can be dealt with independent of demonetisation and should be evaluated separately. If raids are to be conducted to unearth black money, that also can be done independent of demonetisation. The two should not be linked with each other,” he argued.

Arun Kumar lamented that India’s black economy results in policy failure and tremendous inefficiency, in continuing poverty and unfulfilment of national goals.

What then is the reason behind the enormous presence of black economy in the country?

“Since the black economy is now 62 per cent of GDP, it implies illegality in 62 per cent of economic activity. It can only be so large if the black economy is systematic and systemic. This is only possible if the state apparatus is a party to the process of committing illegality and generation of black incomes. Thus, the involvement of the policymakers (politicians) and the implementer (executive) is needed along with the businessman,” Arun Kumar quipped.

There have been dozens of committees and commissions in the last 70 years that have gone into various aspects of the black economy. They have given thousands of suggestions and hundreds have been implemented and yet the black economy has been growing.

“Demonetisation is not the first step taken. The problem has to be tackled politically, so that the triad (involvement of politicians, executive and the businessmen) is dismantled. Even if one of its three arms are severed the problem will begin to dissipate.

“This requires accountability from each of the wings and that will only take place when movements force them to do so. It will not happen by anyone’s goodwill but would be triggered by change in the consciousness of the people of the country,” Arun Kumar said.

He expects the readers of this recent offering to understand the political nature of the black economy and not think that there is a “magic wand” which can instantly solve the problem.

“In this sense, there are no immediate solutions and everyone has to work to strengthen democracy in the country so that accountability is brought about. The more people understand this and the more they oppose it politically, the quicker the problem would be solved,” he added.

“Understanding the Black Economy and Black Money in India” attempts to tell its readers why the November 8 gambit failed.