 In a throwback to 8th November 2016, the Reserve Bank of India announced on Friday evening the withdrawal of currency notes of Rs. 2000 denomination effective September 30. The central bank said it did not print the Rs. 2000 currency note in the last four years and the banknotes are now reaching the end of their four to five year lifespan. Is what the RBI has done a painful reminder of the ghost of the 2016 demonetization experience when many died waiting in queues to exchange their currency notes at banks. Students could not get admission, people could not seek treatment in hospitals and the consequences were especially disastrous for small and micro businesses. According to news reports on Saturday, about 89% of the 2000 denomination banknotes were issued prior to March 2017. Their total value declined from Rs. 6.73 lakh on March 31, 2018 to Rs. 3.62 lakh or just about 10.8% of all banknotes. There is also a view that there will not be similar hardships now as there were in 2016. But let us go over to Professor Arun Kumar, a noted expert on the black economy in India, which is also the title of his immensely popular book on the subject. Let's ask him what he thinks will be the effect of this new withdrawal of Rs. 2000 notes. Professor Arun Kumar, thank you very much for joining us. You know, can we begin by what the government achieved by introducing these notes of Rs. 2000 denomination and now what it has achieved by withdrawing them? So you know, these 2000 rupee notes were introduced because we needed higher denomination currency notes to ease circulation in the economy. You know, the RBI had asked in 2015, the Ministry of Finance, whether we can issue 2000, 5000 and 10,000 rupee notes. The Ministry of Finance did not agree for 5,000 and 10,000 rupee notes, but agrees to 2000 rupee notes. So therefore the plan was to introduce these notes because circulation required more notes. 1000 rupee notes had been introduced about 15 years earlier. They were inadequate to doing transactions. You know, as the economy expands and the inflation takes place, more and more transactions take place, more and more money is required for circulation. So that was the reason. So in fact, the logic was not that 2000 rupee notes were introduced because of demonetization. Demonetization was done because 2000 rupee notes were going to be available from November. So logic was the opposite of what is being given out now. So 2000 rupee notes were required for circulation in the economy because the economy had become much larger. Now what the government is saying is these 2000 rupee notes are not needed, you know, which is not the case, which was not the original logic. And they're saying we are withdrawing them because now they're not serving the purpose, but they are serving the purpose of transactions, you know, and you've actually started withdrawing them. So their availability has gone down. And that's why whatever 2000 rupee notes are available, they're being used actually for a variety of reasons. One is the households need money for precautionary motive. You may have an illness, you may have some other. So it's not that the average family will hold large amount of these notes, but maybe the one crore, the top, you know, percent, 3% of the families, they needed for various precautionary purposes. They will hold two, three, four lakhs of rupees of cash at home, of which half or three quarters of which may be in 2000 rupee notes. Then there are businesses they needed for working capital, especially the small businesses, the micro businesses, and there are more than six crore of them. When farmers, their savings may be held in partly in this 2000 rupee notes, and there are 11 crore of them. So basically large percentage of these 2000 rupee notes are held either by small businesses or by farmers or by well-off families as transaction motive, as precautionary motive. Now what may be hold at the black wealth? And that is what you know, the government fears that large number of people are holding these 2000 rupee notes as black wealth. Now that also is really not the case. If you assume that this entire 3.6 lakh crore is being held by people who hold 10 crore rupees, then only you can say 36,000 people will be able to hold it, okay? Okay. Because 36,000 to 10 crores will become 3.6 lakh crores, right? So that's also not the case. And then we know that others also hold. So maybe 3, 4,000 people hold it in the form of cash at home for black wealth purposes, you know? And anyway, black wealth consists of many things. You know, just like white wealth consists of many things. You can have real estate, you can have bank balance, you can have shares, you can have debentures and so on. Similarly, black wealth is held in a variety of forms, including under-invoiced inventory and you're, you know, under-invoiced capital and various other things that you do. So therefore, you know, it's not that this black wealth is all cash. Cash is less than 1% of the black wealth. So even if you could take out that 1% of the black wealth, 99% would remain. So then, Professor, then what are we achieving then? What is the motive behind the RBI's announcement? Then they say that, you know, a life cycle is four to five years, life cycle is over, therefore, clean money policy, even that doesn't hold water. Because if you are saying that these are not really being circulated, then the life cycle will be 10 years rather than four to five years. Then it's reading the clean note policy. So in other words, you know, the logic I do not understand at all, because not going to take care of the black wealth is not going to stop black income is not going to stop terrorism is not going to, you know, stop, you know, the counterfeiting of currency. So what is the purpose? And anyway, the numbers are coming down. They were at the peak, they were about 6.5 lakh crore. Now they are 3.6 lakh crore. They're already almost half. So slowly they would have kept on decreasing. So I can only see a political purpose. The political purpose is that the government wants to say that we are taking care of black, you know, and at the time of demonetization, the public thought that that was stepped to take care of the black wealth of the rich people. Similar logic they'll try and give that no, we are acting against black money and black money was being held. And you had the pictures of, you know, these people like the Bengal minister who got caught where, you know, large amount of cash was caught recently also, you know, you had pictures of large amount of cash being caught, etc. So these pictures that they're addressing, and the idea is that, you know, this charlotte's person, which is what the Karnataka janta seem to have been swayed by. So they're probably trying to address that political question. Similarly, in demonetization also, they were addressing the political question rather than the economic question. Do you think that there will be scenes similar to what happened in 2016 is specifically with reference to the smaller businesses. They really had a very tough time. Ordinary people had a tough time. Now the view seems to be that ordinary people might be spared of, you know, the suffering of standing in lines and, you know, some died in those lines. But will the small business suffer all over again? So you're absolutely right, you know, as I said, out of 30 crore families, one crore may be holding the 2000 rupees, no holds. But the rest 29 crore would not because you know, in the unorganized sector, as the Eastern portal data tells us 94% said they earn less than 10,000 rupees a month. If you're earning less than 10,000 or 20,000 rupees a month, you're not going to hold 2000 rupees notes, you know, you're not even going to use them for circulation. So the 1% families in the top echelons top to 3% would be having this kind of currency in hand. So they may be going in line, but the others will not. However, there'll be an indirect effect. The indirect effect is that the small traders, etc. If they find they don't have cash because they're not able to change their money into 500 rupee notes easily, then what will happen is the businesses, the small businesses, the micro businesses, they will come to stand still, and they may not be able to pay salary by raw materials. So they may reduce their employment temporarily. This will be a temporary thing, but it will have an impact on the economy. Now that will lower the income of those workers who get retrenched at this point of time. So the economic effect will be there because at the moment, you know, the small businesses, they're 6 crore plus small and tiny businesses, the farmers who have to pay wages, etc. in the fields, you know, they may be affected. So employment may get affected. The economies may get affected, you know, at the lower levels, not at the upper levels, upper levels can do with the electronic transactions and bank transactions, etc. On which there'll be no impact. Top 1% would be standing in line or changing their currency. And the others will be indirectly affected because of the employment and the decline in GDP. So in a sense, there are two parallels with 2016. One, you need a lot of political rhetoric right or wrong to cover up the impact of this. And two, the suffering will again be imposed on the smaller traders, the smaller companies, the smaller farmers, actually farmers of all kinds who want to sell their crop and buy their supplies. So then even the last time there was an election, a prominent election, was there before demonetization? Now again, after the demonetization, yes, election coming in February. This time the important election has just gone by. And three more elections are coming, right? But I think the image, you see the 40% Sakara image, that needs to be dented that we are active, we are proactive, we want to tackle black economy. And you know, the image last time was that even though the rich did not suffer, they managed to convert their currency into new notes, they knew the bankers, they knew others, they paid money to get the notes converted. Okay, so this time also the image would be that okay, this is a step against the corrupt and the black money, etc. And the public bought that image last time. Yes, not by that image to the same extent, but it'll be seen, government can always say, look, we are doing this. And some of the BJP spokesperson who've come, they've given the same logic again about these notes, as was being given up at demonetization, saying that black money would be affected, terrorism would be affected, counterfeit currency would be affected. But if none of that happened then, and that is a much bigger step. This step is hardly going to dent any of that. It makes a difference that this time more time has been given will shopkeepers traders simply stop accepting the notes right away. Absolutely, you're absolutely right, right away, even though it will remain legal tender, but nobody's going to accept it. So circulation will stop immediately. And that's why I think there may be cues in the coming 10, 15 days, converting notes, etc. people will be in trouble, small traders, etc. will not be to carry out their business that well. At this point of time, even though only 10% of the currency is being withdrawn. And so, you know, it'll take time to replace this with new 500 rupee notes. But that kind of shortage that was there in November 2016, that kind of shortage will not be there. But it seems from what you say that this is an unnecessary move, this will not serve any of the purposes that the politicians and spokesperson for the government are trying to convince people about, and that there is, evidently, a political motive behind this move as in 2016. You think it's unnecessary? Absolutely, it is not necessary because it was already going down. It had already have. And if you took more proactive steps to reduce it, you could have reduced it further and made it negligible part of your currency, you know, like, you know, if you remember in 1978, there's only 135 crores worth of the high denomination notes. And it was 0.6% of the total currency in circulation then. So this number would have come down from 10% to 1% or less would not have mattered at all. And as I said, at most 234,000 people hold this in the form of black wealth, which is not declared to the government. Right, last question, you know, we compared this particular withdrawal of currency with the one in 2016. And then we say that, okay, this is 10%. That was 86%. So this is very mild. But if that hadn't happened, would 10% not be disruptive enough bad enough a decision? No, so you know, as I said, this 2000 rupee currency note was not introduced to take care of demonetization. It was to improve transactions. That need will still remain because the small traders and businesses and the farmers etc. would still need to hold cash because that's what they used to these are cultural practices. And saying that less currency means less corruption is not true. Because in Japan, 18% of GDP, you know, the cash to GDP component is 18%. You know, in India, it's 13%. In Nigeria, it's 1.4%. In Sweden, it's 1.4%. So there's no direct correlation between how much cash is in the economy and how much corruption is there in the economy. You know, so it's a cultural practices. It's the way you do business that differs across countries. So you can't compare one country with other, you can't even change these practices very quickly. It takes time. So even though the government is attempting digitization and people are using more UPI and various other things, still the currency in circulation is going up is gone up from 18 lakh crore to about 35 lakh crore. The percentage of the economy, what was about 12% has gone up rather than come down. So in other words, the digitization will take place slowly, less cash economy will take place slowly, you can't push it. You have to change the cultural and the practices. What you require to do to check black income generation is to increase transparency, to increase accountability, you know, where every Khomchawala on the pavement has to pay Hafta, you know, to the municipal authority, to the police. And you know, there's lack of accountability in the political class, there's a lack of accountability in the bureaucracy. If you were to tackle that, black income generation would go go down completely. You know, so we are barking up the wrong tree. You know, 10% of the currency going out of circulation. Is there an acceptable level of hardship? We know when we discuss this kind of thing, I mean 10% is a large number. But the point is, you see currency when it goes out, your velocity of circulation can increase. People is circulated more. So it's not the amount of cash that you have, or the amount of money, but how fast is it circulating? So the circulation can go up and take care of the 10% that was not there. But given the cultural practices, such as slowly the demand for 500 rupee notes would have increased. And maybe you have to increase the 1000 rupee notes also, you may have to introduce the 1000 rupee notes. You know, and some suggestions seem to be to introduce the 1000 rupee notes again. All right, so it looks like a very disruptive scenario where you're introducing and pulling out notes. It seems like something that can cause a lot of instability, people will be unsure of what to expect next. Right, right. You're right that there'll be uncertainty, I'd say, apart from instability, uncertainty. And whenever there's uncertainty, then people hold more cash. You know, so the demand for cash may increase even further, even though people may be scared, the next 500 rupee notes may get demonetized again. You know, so in spite of all, you know, there'll be a lot of confusion. Our direct tax GDP ratio, which should have shot up if black income generation is affected, remained at about five and a half percent of the GDP. Slowly, it's gone up to six percent, but in between it had come down. So there's no such evidence. Similarly, GST collection means indirect taxes. Indirect tax collection was around 10 and a half percent, it remains around 10 and a half, 11 percent. So it's not that indirect tax collection went up. It's not the direct tax collection went up. So a tax GDP ratio did not change at all, which means that the black income generation has continued as before. Because if the black income generation comes down, then that would change. And that is because under GST, it is so complex that you have all kinds of black income generation, whether it be fake companies, shell companies, whether it be eBay bills and so on and everything, you know, black incomes are being generated. Similarly, as the Prime Minister said, only 1.5 crore Indians are effective taxpayers, so 140 crore. So even though the number of people filing has gone up from say 5 crore to 8 crore, but also the number of people declaring nil income or very low income has gone up. It's not the number of people paying taxes that has gone up, you know. So therefore, we still have about 1.1 percent of the population is effective taxpayers. That is according to my estimate, about 5 percent should be effective taxpayers. So we haven't been able to make a dent on that, you know. Right Professor Ankumar, thank you very much for joining us. And that is all we have for today. We'll be following this and other stories on our website, newsclick.in and on our YouTube channel, NewsClickin. Keep watching NewsClickin and give us a follow to stay up to date on the latest developments. Thank you again for watching.