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Mainstream, VOL LV No 40 New Delhi September 23, 2017

Eminent Economists’ Views help in Understanding Demonetisation

Saturday 23 September 2017, by Bharat Dogra


Many thanks to Mainstream and to Prof Arun Kumar for increasing our understanding of demonetisation-related issues with such clarity. Prof Arun Kumar is, on the one hand, an eminent economist and also a top expert on black money. On the other hand, he is also known for speaking with a lot of clarity on such complex and controversial issues. Hence Mainstream selected just the right expert for bringing greater clarity to this issue at a time when very conflicting news and views are appearing on this issue in the media. One additional question that arises is: why are independent top experts like Prof Arun Kumar not consulted when such controversial decisions with very uncertain outcomes are being taken?

In this context, I would like to draw attention to the views of another eminent economist and statistician on this issue. Pronab Sen, the former Chairman, National Statistical Commission, has said that demonetisation was an economic disaster and its worst impact on economic growth is likely to be revealed later when new data comes in.

Responding to questions by the India Today magazine (September 18), Sen said: “The main adverse effects of demonetisation have been on the non-corporate sector, and the present GDP estimates reflect only the performance of the corporates, and the non-corporate estimates will only be incorporated once the informal sector survey data becomes available. Insofar as the corporate sector is concerned, demonetisation has had a relatively small effect arising from the demand side.”

On the other hand, the impact on the informal sector has been much more severe. Dr Sen continues: “The big casualty is the informal sector, which includes agriculture and a large part of construction. Since these sectors are the main generators of jobs and livelihoods, these are also casualties.”

Pronab Sen has added that the after-effects are likely to linger on for sometime. He has stated: “I expect the pain to last at least another year. Perhaps much longer. In 2017-18, I do not expect the growth rate of the GDP, even as measured by corporate data, to be above 6.5 per cent. With non-corporate data, it will probably be sub-6 per cent, may be significantly lower.”

In a very significant observation Dr Sen further stated: “What it (demonetisation) has done is to increase the formalisation of the economy, not by increasing the formal sector but by reducing the informal.”

Summing up, Dr Sen says about the impact of demonetisation: “A political masterstroke and an economic disaster.” Elsewhere in the response he says that at best demonetisation can be called an economic misadventure and at worst a disaster.

In another article written for The Hindu (September 8), Pronab Sen has said that as most of those having loads of black money hold most of it not in cash but in real estate, gold, stock market and in tax havens or other places abroad and the share of black cash in total black money is only six per cent, the demonetisation policy was at variance with the main stated objective of dealing a big blow to black money. The outcomes of demonetisation in terms of both the originally stated aims of reducing black money and reducing fake currency notes are, according to Dr Sen, “abysmal”.

Bharat Dogra

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