 Hello and welcome to NewsClick. This program is Real News. We are going to discuss the demonetization effects of the Indian economy and we have with us Rajat Nag, former managing director general of Asian Development Bank. Rajat Nag is a banker. Do you have any examples of demonetization on this scale that has been done for any economy except with the currency has totally stacked? No, I don't. And more worryingly, even where demonetization has happened, including in India twice actually, 46 and 78, none of this scale and where it has been done, even at a lower scale, it hasn't worked. So, the evidence is fairly scanty. When you say it hasn't worked, sometimes the currency's tank, they become highly devalued and new currencies are put in place. So, demonetization works for those kind of scenarios. In that case, demonetization is neither here nor there because the currency, as you say, has already tanked. It has become worthless. So, basically, you bring in a new currency. But India was nowhere near that situation, is nowhere near that situation. And then to have a demonetization of about 86 percent of the value is quite staggering. So, two issues here really. What is the objective of demonetization? Now, there is a scale of the demonetization that's taking place. On the question of the objective of demonetization, you think that black money as an objective has been done in earlier demonetizations in different places? It has been. And as a matter of fact, that often is the sort of main objective. But I think one has to be clear what do we mean by black money? One is the black wealth and the other is the black in cash. Now, the black wealth, which is ill-gotten wealth and basically one on which tax has not been paid, is hardly held in cash. They are held, you know, in the form of properties in somebody else's name, gold and even more just got out of the country and then brought back in form of laundered money. So, one has to be clear what is it that we are after? If we are after the amount held in cash, ill-gotten, black cash, estimates vary from 6 to 15 percent. Even 4 percent. Even 4 percent. Okay, but even if I'm liberal and generous and make it 15 percent, is that really going to still come back? And even on that, evidence is scanty because people with that, you know, amount of ill-gotten wealth will find ways of converting into lower denominations by paying a certain discount. Okay, so what's going to happen is large number of people with genuine, you know, 500 and 1000 rupee notes are the ones who will be inconvenienced dramatically. You know, it does appear that almost all the money is going to come back and the measures that the government has put in place. Recently, saying that you would explain why you waited so long while initially saying 35th December is the end date, don't worry, don't be in a rush, doesn't indicate government is now worried that the money is coming back and they would like some money not to come back to declare success. The whole point of demonetization would be if you can destroy that stock. Now, at the moment, roughly about 80 percent, 85 percent is already in and in the remaining few days of this year, probably more will come in. So, now that does not mean that all the money that has come in is not black money, but what will happen is it will get very difficult for the authorities to really find out because they'll get dispersed in myriads of accounts. You see, my feeling is that one should focus on the objectives first. And there I find that there has been a shifting goalpost, but I think the government or any government from public policy has to be very clear what is the principal objective. Now, if the principal objective was to fight corruption, and it's a very worthwhile objective, then the issue is whether this is the way to do it. Evidence all over the world, including our own experience of the 40s and 70s, points out that it is not. There are other ways to fight corruption, and it must be fought. You go after tax administration, you go after transparency, large bank transactions, you go after properties held in sort of, you know, the Benami properties, you go after money laundering. Those are the ways to do it. Now, even if you did demonetization of less than a thousand rupee note, one option would be, suppose we said, okay, we've got to really destroy that stock of cash, maybe one could have been, go after a thousand rupee note, not the 500, but 500 and thousand together, 86% of the, you know, stock of currency. My concern is whether the objectives, policy objectives were clearly thought through. Now, I have to assume that the government has access to brilliant minds in the government and elsewhere, and they thought it through. But that is where I think the debate should have happened, on what is it we are trying to achieve by demonetization, and quite frankly, it's not clear to me because it keeps sort of changing. 59 notifications, I think, in the last, or 40 odd days, which would seem to indicate continuous change of mind of how this thing is to be done. But also, I think I'm focusing on why and what is it trying to achieve. You see, one has to make a distinction between black wealth, which is essentially the stock, and the generation of black income, which is really what people are most concerned about, how, you know, the black income being generated. Black wealth, which is the stock, even if you assume demonetization will wipe it out, and as we discussed, it won't, what are we going to do about stopping the generation of black wealth? Are we going to be able to reduce corruption? Are we going to be able to reduce the generation of black income? And then you look at the pain, which is horrendous, and the impact on the economy. You know, 95%, 60 to 90% of transactions in India are based on cash. India has the largest ratio of cash to GDP, 12.8%. China is next at 9.5%. 80% of our workers are paid in cash. So my concern probably is that even if the objectives are clearly defined, and as I said earlier, at least I'm not clear, the implementation is going to be horrendously difficult because we are a cash driven economy. And this is the other point. If we want to shift from a cash driven economy to a digital economy, there is no need for digit demonetization. That's right. Even in countries which have gone sort of almost cash like Sweden or the Scandinavian countries, they took a good 15, 20 years and you don't digitize a country like India overnight. And the pains are horrendous, even if it is successful. And what I'm afraid of is that the digital divide in this country is going to get even worse. There's absolutely no reason why we shouldn't go more digital. There's absolutely no reason why we shouldn't try to get more cashless. There is no reason why we shouldn't get into more in the banking system and our other infrastructure provides a platform. But to do that, you don't need to demonetize, as you say. And even with demonetization, you will not be able to achieve it because most of the people, that's 45% that I mentioned in the formal sector, are not in the formal economy where it would work. So the impact... That's 45% of the economy, but 80% of the people. 80% of the people, exactly. Exactly. Now, the impact on the economy is going to be significant because it's quite a shock. It's a tremendous shock. Now, I haven't done the numbers myself probate, but the estimate is going as high as 3%, as low as 0.1%. My feeling is probably going to be more in the 1% to 2% range. But be that as it may, the impact on the economy is going to be sizable. Simple. The GDP depends on the money and the circulation. And you've taken both out. Both out. And the economy, as I said, is very cash driven. Be it in the agriculture sector, be it in the transport sector, be it in the construction sector, daily wage laborers are going to get laid off, etc. So the chain reaction will continue. The other issue that I think we need to talk about is, Mr. Jaitley has said, we will give digital money and we will not issue all the money back. Now, that's a banker's promise which is being broken. Because if I put money in the bank and you tell me, I can't take it out, then that's really violation of the reserve bank's promise given on every note. And the second part is, he seems to believe that people will be also, there will be more money to lend. Now, in a deflationary situation, which is what you were saying that we would be going, the depth of deflation, we don't know, who would actually borrow? My concern is not with the urban setting where Mr. Jaitley's sort of statement that I will not give cash but I'll give it in digital form may work. Because if I have a bank account and I can withdraw, I can do online payments, my concern is for the large, in spite of the fact of getting people into the Jandhan Yojana and all of that, there's a large part of our population which will not have access and for whom cash is king and that is their lifeline. So, I think that's a very important point. But going to what you just raised, because the impact on the economy, the detrimental effect on the economy, obviously economic activities will start to sort of splutter. Now, how long it will last one year or more, time will tell. So, India from being the fastest growing economy in the world will certainly slip. Now, whether it will slip from 7.5 by 2 percentage points or more, time will tell. But the issue is, we have taken a step with ostensible gains which at least are not very clear to me and is the gain worth the pain. And that's I think a debate which will have to continue. Thank you very much Rajat. We'll come back to you on this issue and other issues of the time passes.