December 8, 2016

Demonetisation is Not a Mechanism by Which Black Becomes White

Excellent interview at http://thewire.in/85070/demonetisation-arun-kumar-discussion/

Some highlights...

An anology ... You’ve withdrawn 85% of the blood from the body and only put back 5% or 10% slowly. Now if that happens, then the body will collapse – the same thing is happening with the economy. Money is actually used for circulation – nobody eats the money, you buy things with it. You know you buy from the retailer who then buys from the wholesale dealer, who then buys from the producer who then pays wages and that’s how circulation happens. This circulation is stopped. Now when you stop the circulation, these transactions don’t take place – whether it be in the unorganised sector, or be it in the organised sector, whether it be transporters, whether it be, teachers doing tuition or, doctors you know – so everybody gets affected.


....

So you’re hoarding money and also postponing discretionary expenditure – so whether it be for consumer durables or semi-durables or whether it be for the FMCG goods – everywhere, demand is falling short. Now that affects the large-scale industry also, so even though large-scale industry may be able to transact in terms of credit cards and debit cards, and may not be directly affected by the cash shortage – they have money supply in the broader sense of money supply. But still the demand is being affected and that is affecting transporters, that is affecting wholesale dealers.

...

 because of the hoarding, the amount of money required in the economy will be larger than what is being withdrawn, because the shortage is likely to continue. And we can discuss what kind of shortage – so they will have to print more than 14 lakh crores to take care of the shortages. You see people’s habits are being affected because now, people will be scared in case this is repeated and they find themselves short. So in other words, they will have to print more than 14 lakh crores.

...

This year the rainfall was good, it was expected that things would improve but because of this particular problem of circulation, people didn’t actually have money to buy seeds, buy fertiliser, buy the water – even where the seed was there and it was planted, buying water has been a problem and buying fertiliser has been a problem because the middlemen to whom the farmer sells, doesn’t have the money to pay. So, temporarily they can make adjustments, get loans from shops. But that, beyond a point cannot continue and that is why many farmers are complaining that they haven’t been able to sell produce. There are two kinds of effects that this will have. The prices in the rural areas will drop and prices in the urban areas may rise because the things are not moving from mandi to mandi, to here.

...

demonetisation is not a mechanism by which the black becomes white. We have to distinguish between black income, black savings and black wealth and black cash. So first, you make an income out of which you save, and the savings then are invested and that becomes your wealth. Now, the wealth is a portfolio of assets – cash is only a tiny percentage.

...

it’s clear why Mr Modi is doing this. All the steps that have been taken regarding the black economy have fallen flat in the last two-and-a-half years. So, the SITs that were set up have not produced results, the income declaration scheme has not produced results. Then your scheme to this Foreign Money Bill – that has not produced results either – about four thousand crores, so that’s less a billion dollars whereas the CBI had anticipated 500 billion dollars. Basically, these schemes have not been successful, so you needed something to show success.

....



Read more at http://thewire.in/85070/demonetisation-arun-kumar-discussion/

No comments:

Post a Comment