 Hello and welcome to the Real News Network and NewsClick. It's been two months since the government of India's demonetization policy, which is a good enough period to assess its efficacy, its impacts on the economy, but also make projections into 2017. And today, to speak with us on this topic, we join by a well-known economist, Professor Abhijit Sen, former member of the Planning Commission of India. Professor Sen, welcome to NewsClick. If you look at the evidence now that's coming in, that's some 97 percent of the demonetized currency is now back in the banks. How would you evaluate Prime Minister Modi's strategy to demobilize black money through this massive demonetization exercise? Well, the first thing is that, yes, two months are up, but on various numbers, which would have expected to have been clearly available. There is still a fair amount of doubt, because, for example, the important one, which you just mentioned, that 97 percent of the old currency has already come back. These are projections privately. The Reserve Bank of India has yet to actually come out with a firm number, even though it is now almost two weeks since the whole process of taking it back from at least domestic residents is over. However, I think that the number of around 97 percent coming back is possibly fairly close to the truth. Although, again, let me remind you that there are people still, I mean, yesterday or day before yesterday, Vivek Debroit, the Niti Iov said, that 10 percent will not come back. I think it's a bit unfortunate that we are getting such data limitations on something which should already be available to us, and that's something which I think is not simply limited to the money statistics, which should be very quick, it should be available within about a week at most of fortnight. It simply shows that there are procedural or systemic problems still going on in terms of how to count things which should be counted. In other words, it's not demonetization as such. It is really the ability of the income tax people, which will determine whatever the government might be able to get in terms of black money. If they do a tremendous job and actually are able to filter through the very large number of accounts where money has come in, they might be able to get something. If not, they won't have got much. But you also see evidence mounting on the impacts in the last two months on the economy. The government's own estimates now cite that there will be a contraction to 7.1 percent this fiscal. There are more pessimistic estimates that look at 6.3 percent. What is your own sense of the slowdown in GDP and is it linked to demonetization so much? See the government's figures that they have given in the advanced estimates are really figures which are projections from before the demonetization and do not really take demonetization into account at all. The only place demonetization may be coming into those figures is a few numbers for November. Now in contrast to that, which actually shows some slowdown as you said, the finance ministry is on record saying the taxes are going up and because taxes are going up, the economy must be doing well. I mean that is a spin here as put. I will come back to that later. But what is it that the CSO figures show? The CSO figures suggest that even without a demonetization, there would be a slight decline in the GDP growth rate from somewhere in the neighborhood of 7.6 percent to around 7.1 percent and that was happening even without the demonetization. Now if you look at the first half of this year, that is the period before the demonetization, really the only growth which was happening at anything like 7 percent was happening in government expenditure. The next one was private consumption expenditure which was growing at slightly less than that amount but still reasonably so. The other numbers which is mainly investment and exports were doing terribly badly on the demand side. So here was an economy which was growing at 7 percent, much of it was on autopilot and what was driving that growth was consumption demand. Now what is happened after demonetization? Now everything would suggest that a number of these things in particular the private consumption demand would have actually either gone down absolutely or at least the rate of growth would have been substantially lowered compared to what it was doing before the demonetization and that is simply because people had less cash in hand, people in any case felt that they should postpone a large item consumption in some cases. Investment, this was a tremendous amount of uncertainty introduced in it and people cut back on investments under those circumstances. So investment which is already going down should have gone down more, unfortunately the advanced estimate assumes actually that the investment would be going up. So to that extent the advanced estimate is clearly optimistic. The advanced estimates do assume that consumption demand would go down, they are projecting from the past but they probably underestimate the extent to which it would decelerate. My own sense taking into account these numbers is that really what has happened is that an expectation that the economy would do relatively well in the second half of this financial year has turned into a reality where the second half will be substantially worse than the first half. Can you clarify some of these GDP numbers in terms of job losses, especially in the micro small and medium enterprises and also if you can speak a bit about agriculture which is something that you have raised concerns about in your earlier analysis of demonetization. Well see agriculture is again one of those stories on which the spin being given currently is somewhat different from the view that a lot of private economists had and many still have. The view was that demonetization came at I mean the view of my view was and I think a lot of people hold that view that the demonetization came at a very bad time for agriculture. The curry crop was coming in and those who had not already been able to sell it found that the market simply had collapsed and prices were very low. The next crop was coming in very soon after that you have to do the sowing for ruby and if you either had not been able to sell your old crop or if you had sold it, but you are actually had to put it back into the bank and were not getting cash and because of being mainly a cash economy there was the expectation that ruby sowing would decline. Now the official view is that yes there has been some drop in prices, but on the main crops things where the government has its MSP system there has not been a drop in prices the MSP system has worked. So the government has actually worked, but they would not rule out that for a whole set of crops and most of your output does not have an MSP there has been a drop in prices. On the curry story I think there is some agreement. On the ruby story the big evidence that the government is bringing to bolster its view point is that the ruby sowing is higher than it was last year and saying that it is much higher than last year it is about 6 percent higher than last year. Now again that is not entirely a surprise because as I said last year was the second consecutive year of drought, but government would say that you know it is even higher than what would be a normal year. Now in some respect obviously therefore, one has to temper down the pessimistic view that we had that ruby sowing would be affected it has not been affected to the extent that I think a lot of us thought. On the other hand it is clearly the case that ruby sowing was delayed it is also the case that whatever was sown may not have been sown with the best seed and with the best variety of the quality of inputs that go in. So much depends on how much you get in terms of yield per acre on the area sown and I think the doubts on ruby will persist till we actually see the yield figures which are not going to come out till about April. But it is fairly correct I mean my own thing was I as I said was expecting a 6 to 8 percent growth in agricultural GDP this year I think we would be lucky to see about a 4 percent growth, but 4 percent would be a huge increase over the last 2 years which averaged only about 1 percent and that is the way the government will look at it, but in any case it was going to be a good agricultural year it will still be a good agricultural year, but would not be as good an agricultural year from the output point of view as it should have been given that there were 2 bad years on top of which there was a good monsoon. And as far as the farmer is concerned things are much worse because the price situation except as the government points out for the crops with MSP the price situation is bad for the farm and related to this is a question that you asked the all India association of manufacturers is claiming that there has been about a 35 percent drop in output and about a much larger almost 60 percent drop in employment in those sectors. Now how good those figures are we do not really know, but those if those figures are anything like the truth or even if half that figure is true then you have a major employment contraction being indicated and this employment contraction is substantiated to some extent for example, the Delhi government is saying that something like 60 percent or more of migrant labor which was working in Delhi have actually gone back to their villages. In other words people have lost their jobs in the informal sector most people were in the informal sector in any case and they have gone back. Now the employment story is going to be much worse than the output story for a very simple reason and that reason is that more than 90 percent of workers are in the informal sector which produces only about 45 to 50 percent of output. Now I mean to conclude you have the budget being presented next month and there is this assumption that you will try and sort of push the economy by increase outlays on infrastructure how do you see or what do you see a possible sort of alternative in terms of bringing back growth with the budget for the next fiscal. You see it is a complicated thing now for very many reasons and I think government will try to push up expenditure, but a number of these variables are still extremely unclear and it is very unlikely they are going to be clear at the moment the government intends to put forward this budget which is on the 1st of February a they might use the fact that the tax collection was fairly good in November to say that they are going to be good I mean so that somehow demonetization has made the tax collection better, but that would be unwise because you do not take one up to be a continuous I think even if there is some idea that you know since more people are going to report to the income tax, tax collection might go up, but they might actually use those numbers to project high tax figures, but that would be at this moment not a very wise thing to do it would be a bit of a fudge that is one way in which you can justify higher expenditure. They might say that the economy will actually rebound much faster than it did because of certain assumptions in other words again use something in the numbers to justify a large taxation growth, but for the same reason again it would be premature to say it because none of these figures are still there certainly your 7.1 from the CSO figures now would justify that sort of projection of taxes unless you in addition assume a much larger increase in tax GDP numbers. The third thing it might do try to do is to say no we will not have a 3 percent fiscal deficit, but we will have a higher fiscal deficit. Now that is the point of view I would actually support I think this is a time in which the government should actually run a higher fiscal deficit. On the other hand governments so far have been a bit constrained on the fiscal deficit thing because they look at rating agencies and rating agencies are going to be much more eagle eyed on the Indian economy after the demonetization than they have ever been. Now for various reasons therefore I think the government is in a bit of a bind if it has to have the budget just then under these you know there is a information shortage a huge information shortage and there is the world economy does not look to great and the domestic economy desperately needs that the government actually go out and spend in infrastructure, but on top of infrastructure the government has to spend on something else and that something else is that you have got to make some effort at meeting the distress caused especially to those who have lost jobs gone back to rural areas. Now that is required in a welfare sense, but for the government that is required even more politically. Now to sum it all up I think really what you got is a huge shock to the economy at the moment it is adding more to uncertainty than to anything else clearly that uncertainty is with a fairly large short run shock, but we are still not clear about how large that shock is possible long term gains still seem to be very very distant. If there are any all of this digital business and things you know they can be they can have effect sometime later, but they are going to only have effect a pretty late and in any case I think what it shows is that there was a major major flaw in the way the demonetization thing was done and that is that with almost all of the 100 1500 rupees notes back you did not gain by saying that from tomorrow this is not legal tender all you needed to do on the day the prime minister made his announcement on the 8th of November to say that we are not going to issue any more 1500 rupees notes and to stick to the timeline that all 1500 notes will have to be deposited at the end of December, but in between you need not have made that funny announcement of it ceases to be legal tender the net effect would have been exactly the same as what you got. Thank you very much professor and especially in terms of laying out the challenges both domestic and external into 2017 with the budget being presented in February and we hope to come back to you for your assessment of the budget as well. Thank you very much.