Arun Shourie's criticism of Demonetization sounds hollow
- In Economics
- 12:14 PM, Nov 22, 2016
- Sagar Kinhekar
Dear Mr Shourie,
As a long-standing fan of your work both as a courageous journalist and minister of disinvestment, I was saddened by the quality of your answers in your latest interview on NDTV. Not so much because you criticized the government’s demonetization policy as I am convinced that every policy of any government should be critically reviewed by people who are competent to do that. This keeps the government on track and becomes a great feedback mechanism for future policy improvements. I was sad to hear your answers because they did not even seem logical much less from an economist who has worked in World Bank.
Mr Shourie, you said people don’t keep black money at home and most black money is stored in the form of assets rather than cash. You, I am sure, must have heard about parallel economy during your days in world bank. Let me help you remind how it works in simple words. The origination of parallel economy is black cash. How does black cash gets generated? It comes out of money earned by criminal activities which are not accounted in white economy and banking / revenue systems don’t have any records of such transactions. Or, a legal white money can be converted into black money by unscrupulous people for saving tax. When they do not report their earning to government for saving tax they in effect push the cash earned, out of white economy. Now as you rightly pointed out, Mr Shourie, people do buy properties and gold with this black money or send the money abroad using hawala route. If they buy gold with that money or property, they DO NOT disclose this transaction on books. Which means the seller of property or gold becomes owner of the cash but the cash does not still get accounted inside any banking or revenue system. Therefore, the cash has still not come inside white economy. The seller again invests it further without disclosing this cash transaction on books and the black cash just keeps exchanging hands. This creates a parallel black economy which I am sure you must have forgotten when you mockingly said that people do not keep black money in cash. Even when people dispose off their money through hawala, it does not remain abroad forever. People bring it back again using hawala and the entire transactions for hawala happens in black cash. In past decade or so, since returns on property investments are not great in foreign countries and India was on the rise, reportedly incoming hawala transactions had increased multifold.
As per a report published by Hindustan times October 2015, cash economy amounts to around 30% of India’s GDP which means around $600 billion. Government loses around $200 billion every year due to this in tax revenue. As per the report India’s tax revenue is INR 9.1 lakh crore, while government loses $200 billion (or INR 13 lakh crores) tax revenue to black economy! The demonetization now has made 85% of this cash invalid as 85% of overall cash in the market was in denomination of 500 and 1000. So, although only part of black money will come back in main stream white economy, 85% of black economy is destroyed in one stroke. Is this Mr Shourie, not a big bang reform? Or would you call it suicidal adventurism even now?
Then Mr Shourie, you also said that one cannot know the impact on terrorist network within 7 days of demonetization. As per a report published by Times of India there may be around INR 1500 crores funds in the hands of Naxalites. One doesn’t need to be an Einstein to understand that any organization which has large number of recruits, needs money to survive and keep fighting. The money obviously cannot be kept in bank accounts as it will be a sure and easiest way to get caught. So these terror organizations thrive on cash from parallel economy we just discussed about. It is no rocket science that Naxals or other terror organizations would have found themselves left with only about 15% cash, considering 85% of cash in 500, 1000 bills were invalid suddenly. While the amount affected may be INR 150 crores or INR 150,000 crores as these are all estimates, but the impact on terrorist organizations is a certainty, no one can deny. Just google and you can read multiple such reports which explain the impact on different terror organizations. This is not government which is claiming that they shot the random sparrow.
You said that common people are praising the demonetization because they look at only broad picture and not detailed impact. Mr Shourie, I have seen wide spectrum of people praising this move. People with degrees from MIT or IITs to the daily-wage workers, Indians are united in black money eradication and fight against corruption. There may be some people who don’t understand nuances of economy but there are many who do and still praise the move. All of them have their own reasons to support the move. Appreciate their zeal for fighting against corruption even on the face of much inconvenience. Don’t dismiss them as ignorant masses.
I sign off praying for success of demonetization as well as your well-being.
Your fan.
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