While the debate on demonetization continues, the government is firm in its resolve to root out black money, curb graft and choke terror funding. In an exclusive conversation with Siddharth Zarabi of BTVI, noted economist and member of Niti Aayog Prof Bibek Debroy says that demonetisation should not be looked as a move in isolation but as a war on black money.
SIDDHARTH ZARABI: We are talking at a time when demonetisation is the single new word that every Indian has on his lips. I want to your assessment at this stage. What has been achieved? What is left? Where do we stand?
BIBEK DEBROY: One should not look at November 8 in isolation. November 8 is part of a broader jigsaw. As part of that broader jigsaw, there are measures that the government has taken and will continue to take—(a) on curbing creation of black income; (b) on addressing black wealth that was not in the form of cash; (c) targeting particular sectors that have been prone to use of black however defined. So all of those are part of this jigsaw and it is not just 8th of December. So far, as 8th December is concerned, despite India's state of the economy, level of development, level of transition, the use of cash in India is disproportionately high compared to even similar countries like Bangladesh, Sri Lanka, Pakistan and the share of cash in India has dramatically short up. I don't know how many people realise that India's cash to GDP ratio today is three times the size of that in Bangladesh and Sri Lanka and higher than that in Pakistan. So clearly there is a preponderance of cash. Depending on which base level figure you use, you have Rs 14 lakh crore floating around and Rs 16 lakh crore figure floating around of high denomination notes. The Rs 14 lakh crore is the RBI balance sheet figure and Rs 16 lakh crore is the latest figure of November 8. The reason I mentioned the cash-GDP ratio is to get the economy going, you do not need Rs 16 lakh crore to be back in the system for transactions. A large part of it was surfeit cash. How much do you need? Your figure will be as good as mine but I don't think anyone would seriously suggest that for purely transactions you need more than about Rs 9-10 lakh crores, which is the level of cash-GDP ratio that India used to have in 2000. From 2000 why should it suddenly shoot up so much? So let's take a ballpark figure of Rs 10 lakh crore. How much has come back into the system? Yesterday we had two separate sets of figures from two respectable individuals in terms of their credibility. One said Rs 6.5 lakh crore, the other one said Rs 8 lakh crore. So let's presume about Rs 7 lakh crore has come back into the system which means we need to get another Rs 3 lakh crore back for the system to function. Here I will draw a distinction between the banks and ATMs because getting money to the banks is not the same thing as getting money to the ATMs because that part of it is largely outsourced. Many people don't realise that there are private companies, which do it. So far as the banks are concerned, I know the target was end of December. I suspect that the problem will begin to ease out by the first week of January that would be my outer limit.
SIDDHARTH ZARABI: When you say ease out, you mean in terms of lifting the withdrawal cap of Rs 24,000? How would you define that easing out?
BIBEK DEBROY: One can define it in terms of the queues disappearing. One can define it in terms of the easing of the withdrawals as opposed to exchange. Exchange is a different issue. Easing of withdrawals is a decision that clearly the RBI and the Finance Ministry will take and convey to us. My personal expectation is that at the end of the month you will no longer have any restrictions on withdrawal from banks. You might still have a restriction on withdrawal from ATMs because of the kind of problems I mentioned. You might have a restriction on exchange, but withdrawals, I would be very surprised if they continue.
SIDDHARTH ZARABI: You mentioned several things and I am going to follow up on each one of them. The big point that you made was to suggest that not the entire lot of demonetised currency needs to be replaced in the system. What sort of economic implications would that have?
BIBEK DEBROY: Well, this word black is used and abused. So let's try to pin it down a little bit. Again I am using those benchmark figures of the cash-GDP ratio in India, which used to be above 9 per cent. Now it is up to 13 per cent, out of that Rs 16 lakh crore. About Rs 2 lakh crores I think was unnecessarily sitting with households but it doesn't mean that it was illegal. It was just sitting there. Why was it sitting there? Maybe people were expecting to buy land, real estate, property and they were waiting for the right time. That Rs 2 lakh crore is sheer waste because it didn't fetch returns for the holders nor did it perform the kind of multiplier benefits the cash is supposed to perform. The remaining Rs 4 lakh crore is black of two kinds of varieties. One is intrinsically the nature of the transaction that led to the creation of that income is illegal–crime, drugs and trafficking. The second kind where the activity is not illegal per se but have not paid taxes on that. Now what is happening is that it is coming back into the system. Out of that Rs 6 lakh crore, maybe Rs 2 lakh crore will be completely extinguished. It will never come back for whatever reason. It was too dark black and so it doesn't come back. It is extinguished which has implications because it reduces the RBI's liability and how the RBI handles that reduction in liability vis-a-vis the Finance Ministry, we have to wait and see. The rest of it comes back into the system. So the fact that it is coming back into the system is desirable and good. It does not legitimise the black money contrary to what people have been suggesting because you still have to pay the taxes, you still have to pay the penalties, you still have to explain the source of income, you are still subject to scrutiny, seizure and summons by the Income Tax department.
This is not a magic wand that solves things overnight. This is a trigger for an institutional change. It will not make India cash less but less cash, formalisation to informal and an organised transition from unorganized. All of these things, part of it is also the GST, will be widening the tax base. So it is part of the churn that is happening.
SIDDHARTH ZARABI: The impact of the velocity of reduced transactions has already been quantified by various agencies and researchers. They are talking about a certain basis points impact on the GDP. I don't want that number from you quite honestly. But what I want to understand from you is in terms of the restoration of business activity and the role that cash used to play? How long would that take?
BIBEK DEBROY:I am glad you are not asking me about GDP because it is a very technical term. Half the people who are shooting their mouths of GDP, trained economists included, I am sorry to say that they do not understand what GDP is. GDP is not just playing out. Particularly one is talking about the real GDP. Now what I mean by that is I am prepared to accept that there will be a hit on activity in Q3 of this financial year with a legacy continuing till Q4 also. But by the end of Q4, I expect it to be pitted out the impact and I expect the recovery, the upward swing in investments, employment and economic activity. However, you choose to pinpoint and define what will happen in 2017-18.