'Pain of note ban will be felt throughout 2017-18'

'Pain of note ban will be felt throughout 2017-18'

India's first chief statistician Pronab Sen believes that demonetisation was an economic disaster.

Sen, currently Director at the International Growth Centre, New Delhi which seeks to build effective growth facilities through engagement between policymakers and researchers, received his PhD in economics from the Johns Hopkins University specialising in open economy and macro economic systems, international economics and public finance. He joined the Planning Commission in 1994 and was responsible for perspective planning and statistics and surveys. Sen was also the principal author of Ninth and Tenth Five Year Plans. He spoke to Annapurna Singh of DH on the impact of demonetisation. Excerpts:

How do you look at the note ban after the prime minister’s 50-day deadline?

Well, the initial pain was to cut down on expenses. But, the bigger pain is gradually witnessed when production gets affected, people's earnings get affected, lay offs start taking place. That pain is going to be much bigger. It is the question of livelihood. The focus so far has been on consumptions.

What steps do you suggest to increase production?

The main problem relates to transactions. There are some transactions which are difficult to make. For example, if you are a trader, you buy, stock it and then sell it. Now, when you are buying, it depends on how many people you are buying from, the transaction mode you are going to use. Remember, a trader buys in bulk and when you buy in bulk, you cannot use Paytm due to volume restrictions. The trader cannot use credit card because that too has a limit.

So, the instruments left are cheques and debit cards. But, not many accept payments in cheques. That brings us to the reality which is that cash mode of payment is mostly accepted. Trade is at the heart of an economic system because it is what intermediates between the producer and the consumer, and once it gets broken, the economy goes for a toss.

Has informal sector has been hit? Any data?

Yes, very badly. We do have some kind of data. It is very difficult to say how long
will be the impact last but I am sure the whole of next year is gone.

Whole of next year means?

Financial year 2017-18. It could be even longer.

How do you compare demonetisation in other countries with that of India?

Demonetisation everywhere leads to disruption. The point is demonetisation in other countries preceeds a crisis. In India, we were not in a crisis.

What is your view on the time chosen by the government?

If the government was so keen on implementing it, it should have waited for the right time. The choice of November was wrong. If it was done in January, the impact would have been a little less on agriculture.

Why do you say so?

Because of the agricultural sowing season.

But the finance minister says Rabi sowing has been 6.3% more than last year?

It is 6% up if compared with last year. Last year was well below normal. Remember, last year was the second year of drought. Rabi sowing looks big on the small base
of last year.

He also says that both direct and indirect tax collection has been up this year compared to last year. So, where is the impact of demonetisation?

Direct taxes are up. That is understandable. Everyone has used the old currency to pay advanced tax. So this is going to be adjusted against the final tax payment. If you are going to analyse it in terms of the year, this is going to have no effect.

But how about excise? That is also up.

It is very difficult to explain. My suspicion is that there are a lot of excise disputes
in courts. The banned money may have been used in that and that’s why the figure is so high.

If all the Rs 15.44 lakh crore (value of demonetised currency) comes back into the system, will it mean there was no black money?

No no. There was black money. That’s why I said the trade gets hit. In fact, the place where black currency actually exists is trade activity. Anybody who is holding black money does not want to sit on the paper currency. With inflation, the value of money is going down everyday. So, he either gives it to a money lender or to a trader at an interest rate. A big repository of black money is trade.

But do you think a country as vast as India can be totally cashless?

There is no country which is totally cashless. In fact, you should not be totally cashless. At the end of the day, what underlines any transaction? It is nothing else but trust. If I go cashless, I then need to have a very high degree of trust in your Paytm, Visa and bank. I have to trust the whole range of people who have no reason to be trusted.

There is speculation that the government is going to put some cost on cash transaction? Is it possible?

Cost, at the first point, yes. If I go and withdraw money from the bank, government can put a cost on my withdrawal. Say Rs 2 on a withdrawal of Rs 100 but once I get Rs 98, how are you going to tax it? The money will go to many hands. At how many hands are you going to tax it? This may disincentivise people from putting money into the bank.

Also, there could be gold clamp down?

The government can. We had a Gold Cont­rol Act. But it was completely unsuccessful.

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