Demonetization and the Black Economy

Title: Demonetization and the Black Economy

Author: Arun Kumar

Publisher: Penguin, 2017 (First)

ISBN: 9780670090075

Pages: 300

The demonetization of high-denomination currency notes announced by Prime Minister Modi on 8 November 2016 was a landmark event in Indian economy. Currency worth 86 per cent by value of the total was forced out of the system all on a sudden. Naturally, this led to difficulties in industry and economy, particularly in the unorganized sector. Even though the government claimed fifty days for restoring money supply, it took nearly three months to bring the situation back to normal. The government took this drastic step to curb the growth of black money and there has been a great debate ever since about the usefulness of the measure. Demonetization had only a limited success as a great majority of the banned notes came back. However, it introduced the concept of financial discipline and initiated the drive to a cashless economy. Financial experts analyzed the initiative with their preconceived political and economic notions guiding them. Arun Kumar is a retired professor of JNU, New Delhi, who has written, studied and lectured extensively on the subject of black money. He was a postgraduate in physics who later switched over to economics with a PhD from JNU. The university is thought to be a hotbed of ultra-leftists and the author’s opinion on Indian economy and demonetization are on expected lines. The book was published in 2017 and the author has offered some predictions on the future of India's economy. If the book is to be believed, the economy would have come crashing down by now in 2019 due to the structural damages inflicted by demonetization.

Arun Kumar’s primer on the nature of Indian economy is very informative. The unorganized sector provides 45 per cent of the country's output and employs 93 per cent of its workforce. But, this sector is opaque to estimation of any kind as its deals are not through banks, and are carried out through cash transactions. Obviously, this sector was the most affected by demonetization. The book claims that production in non-farm sector was completely stalled, rate of economic growth turned negative, investment fell and this led to a recessionary situation. This fall is not reflected in the official figures by the fact that data for the unorganized sector comes with a lag of one to three years.

In his all-out tirade against demonetization and Modi, Arun Kumar is extraordinarily accommodative of some of the ‘lesser’ evils. He supports the use of very high denomination notes as that will facilitate ease of cash transactions, in a predominantly cash economy like India. He opposes cashless modes of transactions and claims that these will be slow to take off because of frauds taking place online from time to time! Both the black economy and the unorganized sector lead to a higher proportionate demand for cash in the Indian economy.

This book presents reasons why an extreme step like demonetization will not score against black money. The author argues that only a small part of the black money would be in the form of cash. The rest would be invested in assets so that a return can be obtained. Black money is only one component of the black economy which is guessed to equal a size equivalent to 62 per cent of GDP. Also, black income generation would remain unaffected. This is not just bureaucratic corruption. A doctor under-reporting the number of patients in his private practice is an example of how black income is generated. There are some confusing aspects in the argument. Transfer income such as those generated by sale of land is not counted as black money because no income is actually generated in the deal. This was just a gain on capital invested earlier. This may be true if both the buyer and seller used black money for finalizing the deal. If the buyer used white money, or at least a part of it, it suddenly turns black and would this not be fit for a case of black money generation?

Some of Arun Kumar’s arguments are irrational and forced. One such case is his visceral hatred to the use of new technologies for dispensing subsidies direct to users’ bank accounts. This has proved to be an effective way to stop corruption. However, the author counters this argument with a stodgy remark that if the people operating the computer are corrupt, they will use the technology to propagate more illegality. Then again, his estimate of when the printing of new notes would be completed goes totally off the mark. He assumes this to take two years even if the presses are operated round the clock. His predictions are apocalyptic in nature and looking back after a gap of two years, we find them laughably facile. He warns that the credibility of the currency and banks would be dented over time and this will result in a shift towards the holding of gold and foreign currency which will be used to circulate black money. There will be flight of capital from India, leading to decline in foreign exchange reserves. Needless to say, nothing of the sort actually happened. Arun Kumar’s criticism of the digitization movement in the economy is stinging. They are said to be undemocratic and he recoils in horror at the prospect of linking his Aadhaar unique identity number to his income tax account.

However hard he flays the administration, there is a grudging admission that the Modi government has indeed been making attempts to tackle the black economy (p.73). Only 3 per cent of the population controls the black economy. At present, the tax to GDP ratio is only 16 per cent and if the entire black money is brought under tax net, this would skyrocket to 40 per cent, which will be one of the highest ratios in the world. On the narration of how black money originated in India, the author leaves out a few aspects probably owing to his ideological commitment. At the time of independence, the Southeast Asian countries were at the same level of development as India. Then they grew at 6 to 8 per cent annually while we faltered. Why did we falter? This question is left unanswered, when the real reason was the socialist bent shown by Indira Gandhi in the 1960-70s. This bred corruption through a labyrinthine network of licenses, quotas and permits. As a result, black money grew by leaps and bounds, which is sustained by the triad of businessmen, politicians and a corrupt executive. There is need for political change which requires new parties and political reform. So, that is the author’s valuable advice to defeat black money – create new political parties and reform. He is silent on the reform measures as well as on action needed against the other two members of the triad, namely, businessmen and bureaucracy.

This book’s political bias erodes its credibility. Its accusations on the Indian government and its democratic credentials, Modi's dictatorial tendencies, rise of fear in society and weakening of democratic institutions are an exact copy of the allegations made by the communist parties against Modi. Arun Kumar’s attack on automation in industry and agriculture due to the feared loss of jobs certify his intellectual servility to petty politics and outdated theories of manual labour. His admonition to Modi to correct the anti-poor and pro-business image of his government before the 2019 elections provides comic relief in view of the ruling party’s thumping win recently at the hustings. This shows the true colours of such ivory tower academicians who have lost all touch with the masses. They dream that Lutyens’ Delhi is India and that if cash is temporary unavailable, the rural businessmen would sit idle like these people who take leave from work occasionally. His intolerance of the private sector is unbelievably anachronistic. He accuses them of dealing with high levels of malpractices in the education sector and being highly rapacious and corrupt in the health sector (p.72). Equally strange are his assertions that there is not much counterfeit currency in the system, not much black money is held in Swiss banks and real estate is not the biggest generator of black money.

There are hundred pages of annexures accompanying the text which runs to 178 pages. A lot of charts and graphs are included but these are mostly irrelevant to the argument. 30 pages are reserved for listing government notifications regarding changes in the re-monetization drive. A chronological list is followed by a detailed thematic list. The outlook is disgustingly pessimistic which is tinged with political partisanship.

The book is not recommended.

Rating: 2 Star