 Hello and welcome to NewsClick, this program is Real News. We are discussing what is happening to the Indian economy post the demonetization taking away 86% of the money in circulation and also not being able to put it back quick enough. We have with us Prof. Surajit Majumdar from Jawaharlal Nehru University Department of Economics. Surajit putting it very simply, it seems the pace at which notes are being printed are slow. We have printed 2000 rupee notes which between the 2000 rupee notes and the next denomination which is widely available is 100 rupee notes. So, we do not able to see seem to be able to use the 2000 rupee notes and we are not printing 500 rupee notes fast enough. From all accounts we are going to take anything between 5 to 6 months to be able to put back the 500 rupee notes in circulation which means that we still see shortage of cash in the economy. What is going to happen to the Indian economy if this shortage persists which it is now likely to do for the next 3 to 6 months. Well, as far as the shortage of cash is concerned it is one very simple way in which one can look at it that suppose you were to say that all the vehicles on the road today at this point of time have to be replaced with new ones. Would the production capacity of the country to produce those vehicles be able to replace them in a short period of time? No, because that existing stock of vehicles has been produced over a long period of time. It is essentially the same thing with the currency. The currency in use today is something that has been produced over every year you add some bit to it. So, you basically have a capacity to print what you need to add every year and now suddenly you are having to replace practically the entire currency and from the figures that have been put out by the RBI it is quite clear that more than 55 percent of the value of the new currency put into circulation is 2000 rupee notes. That is the minimum it is probably even higher than that. So, which is not going to be sufficient. So, you really have to now add currency of smaller denominations in the coming years which means more units and therefore, the fact that it is going to take a long period of time is absolutely clear. I think the government has also accepted that they will not be able to reach even more than 50 percent replacement of the currency by 30th December and that is why I said they do not seem to be they it does not appear they will be able to print the 500 rupee notes within require about 15 billion of them and that would take given the fact that they can only print all four presses put together can print only 3.3 billion pieces of notes per month. So, therefore, the shortage of cash is going to be felt for a period of time except the extent that the requirement of cash comes down because economic activity itself has shrunk in the meanwhile. The consequence of this shortage is that at least one important mode with which people make payments is not available to them in the requisite quantity and beyond the point it is not possible to shift to alternative modes of making payment. Surajit, we have looked at the non-cash transactions in the last month, November even that has come down. So, it is not that it has increased to compensate for the lack of cash transactions. Actually, because if you have a situation where economic activity contracts because of the shortage of cash is going to affect all transactions that means the total volume of transactions or value of transactions themselves have come down and therefore, even non-cash transactions may shrink as a result of the shortage of cash. So, essentially the problem is this that the amount of money that is available with people with which they can make payments is less. If the total value of payments that people can make is reduced, then the total value of payments people can receive is also correspondingly reduced because ultimately you receive what someone else pays which means that the total economic activity which involves buying and selling that can be sustained with this particular level of income has to shrink. Are we looking at the economy in recession? Right now do you expect November, December which is the two months which has felt the demonetization the economy to actually shrink? I think definitely the economy will shrink and may shrink very significantly. I am not so certain whether our statistics about the economy will fully capture this effect. Let me give an example of that. Suppose there is a rickshaw puller who used to transport people from one point to another point and because of the shortage of cash someone people decide to just walk that distance and do not use that rickshaw anymore. So, there is that particular service it is total production of that service and the income that would have accrued to the rickshaw puller as a result of that activity virtually disappears completely for a period of time which statistical measure is system is going to actually capture that fully because a lot of our data comes from very organized kind of units and we assume that there is some normally some relationship between a set of transactions which we can record and the transactions that we are not recording but those ratios may not be valid for this particular part. So, services part people more difficult to capture services like this but if we look at industrial production and we have looked now in Firuzabad, Bangles, in Aligarh, the lock industry, we looked at Moradabad, the brassware industry, Agra, the footwear industry, precipitated drop in production. Aligarh at 4000 crore annual income there is 90 percent of the factory seems to be shut down. So, we are really seeing already even what is captured is also being also shut down, are we therefore also looking at even these organized forms which are captured in some statistic or the other also showing much lower production and therefore actually capturing that we have already entered into recession. Well, let me put this with that the organized units they are also taking a hit it is not that organized units don't take a hit as far as the industrial sector is concerned the industrial index of industrial production figures that came for October which is before devaritization themselves showed that compared to the previous year production was down by 2.5 percent. Now this and this has been going on for some period of time. So, these sectors are also going to take a hit what I am saying is in addition to that even in the industrial sector there are unorganized units and the distribution of the extent of downturn between organized and unorganized sector units may not be in the same ratio in which normally production is distributed. And since we are going to estimate what is going to happen in the unorganized sector often from what is there in the organized sector our data may not fully capture the extent of the decline that will take place in the GDP. But you are sure that the GDP decline is going to take place in this quarter. Absolutely, there is no compared to what would happen in a normal year this has to there is no way in which you can withdraw such a large part of the currency from circulation and not see the effects of that in terms of contraction of GDP because after all the production of GDP depends on the use of money. We have already discussed the black money coming back into the banks it is this is going to be a long process money not coming back to the banks which is initial expectation has it happened. So, the black money side the ledger seems to be rather bleak for Mr. Modi. But if a top of that we have a stagnation in the economy and in fact a contraction drinking of the economy recession it appears that this is this seems to been absolutely economically very stupid move. Yeah, so largely the opinion amongst economists is pretty unanimous and exceptionally so it is never normally so unanimous and opinion on any matter but this time it is because everyone can understand that there are on the one side serious consequences that you are going to derail a process of economic activity through which people generate their income through which in which people find their work and employment. So, you are going to have that derailing effect as I said that on that there is no dispute you can quibble about what is the degree to which that will happen but you cannot dispute that particular effect. On the other side everyone realizes that the possible hit that the black economy could take from such a move was always minimal that was a given before the demonetization exercise you did not need the exercise to know that that would be the result for the simple reason that the amount of cash that is held by people is very small fraction of the total income that is generated in a year it is a very small fraction of the total wealth that are held it is held by people. So, even if you do something as far as that cash is concerned the effect on the black economy was not going to be severe that was in any case a given right at the beginning and what you therefore can only do is to disrupt the particular process. After all black incomes are not generated from a process which is completely delayed from the process by which other incomes are generated. So, they are all they are not two distinct parts of the economy they are interlinked parts of the economy. So, it is not just so those who earn black incomes they may not be that severely the black income may not be that severely affected as the white income may be and the white income that is going to be affected more severely are of those who are the most vulnerable. We have already seen that none of the riches standing in queues or spending sleepless nights while people are. So, that that is already there the poor have returned lot of the daily wage workers have returned from the towns to the villages this has been going on. But what kind of economics sense it was there in the government whoever planned it do you think that singularly bereft of economics or basic economics or is it that they have a different kind of economics which you and I do not know about the world does it know about well if they have then of course we do not know about it. But what I would say is this that more realistic way of looking at it is that you knew that the effects on the black economy were not going to be significant that was not the error but perhaps the certainty with which you took that action you knew it was not going to affect the black economy significantly because that was not your intention in any case you knew the effects on the majority of the population in India would be pretty drastic and adverse. If after knowing that these two things you undertook such an action then perhaps it reflects an attitude towards the Indian people which is that the belief is that these Indian people you can hit at their basic requirements put them into the in conditions of adversity and you can still fool them into thinking that what you're doing is for the benefit of the nation. So it requires an understanding of true contempt for the people of this country for you to undertake this kind of an action. Thank you very much this is all the time we have for news click today please keep watching news click do subscribe to our website our newsletter and also our facebook page.