“The economic and human costs are too large,” says Pronab Sen, Country Director, India Central Programme, International Growth Centre, when asked to comment on the government’s decision to withdraw ₹500 and ₹1,000 currency notes from the market and replace them with a new series of ₹500 and ₹2,000 notes.
Sen, former Chief Statistician to the government and also Chairman of National Statistical Commission, pointed out that the formal economy that works on a low cash component, accounts for less than 10 per cent of the population.
“What happens to people in the informal sector whose income is not guaranteed?
“If production is disrupted, then the effect of the exercise will be very large and painful,” he said in an interview to
What is your take on the government’s move to withdraw ₹500 and ₹1,000 currency notes from the market? Do you think it will help in checking black money and counterfeit notes?
It will help in checking counterfeit currency, but it is doubtful whether the fake notes were coming in the two denominations.
Usually, counterfeit notes come in a single denomination. But production of new counterfeit notes will take some time and to that extent, the move is helpful.
I am a little more sceptical on whether it will check black money. It will have no effect on corruption and tax evasion as people will continue to indulge in them.
Also, the so-called black money serves a very useful economic purpose; most of it doesn’t sit around but goes back into circulation in the informal sector through activities such as money lending.
If there is a permanent destruction of black money, the impact on the informal and rural sector can be very large.
Could the government have handled the implementation more efficiently? If yes, what according to you could have been a better approach?
It could have been handled in a much better way. Typically, in countries where demonetisation is done to check fake currency, there is a pre-announcement that after a certain date, only the new currency will be accepted. In the interim, the old and new currencies continue to circulate.
But, if the objective is to give a shock to the system, then a degree of secrecy is maintained.
This means that there is no pre-announcement and no preparation, like in the current situation where ATM machines have not been calibrated and the ₹2,000 notes came into circulation before ₹500 notes.
This has made the system messier and the economic costs will be very high.
How will this move impact the consumption demand and economic growth?
The impact on the consumption demand is the least of the problems as it can be postponed to a large extent. At present, it is just a liquidity problem. The real impact on the economy will be if the production gets impacted as it would then affect incomes and then have a longer term impact on consumption.
The GDP growth will also be affected this fiscal due to the demonetisation exercise.
Will it ease inflation?
Inflation could follow a U-shaped curve. It will ease temporarily as the currency in circulation will decrease. But, if demonetisation affects production, then inflation will rise in the longer run as it will create a demand and supply mismatch.
Even the impact on bank’s lending and liquidity will be short-term, as people who deposit the cash will eventually want to withdraw it. So banks won’t be able to increase their credit facility.
How will the currency demonetisation affect the rural sector?
It will have a huge impact on the rural economy and informal sector. Almost all agricultural transactions are done on a cash basis. Even the farm loans given by banks are withdrawn in cash. A fair proportion of workers in the urban economy have salaries and wages and access to formal banking channels, which is not the case for most of the rural economy.