 Hello and welcome to NewsClick, this program with Real News. We're going to discuss the effect of demonetization, the black money hunt as it is being portrayed by the government, and the possible impact on the economy with Shankar Aguraman, who is a senior journalist, economic journalist with the Times of India group. So what is really happening? What's the story? Why is there a shortage of cash in the economy still? If you look at the statement they've made, the one that you refer to about 50% of the cash having been brought back into circulation. It's a very cleverly worded statement. What it says is that 50% of the cash which was actually in circulation has been brought back. Now it's anybody's estimate how much of the cash that was out there is really in circulation at any given point in time. So the estimate of the amount of money that was in the system in the form of 500 and 1000 rupee notes has been revised a little bit over time, but the last figure we've heard is about 15.4 lakh crore. Now half of that would be 7.5, 7.7 lakh crore. Whereas what the government is actually claiming is only about 5 lakh crore having come back in the form of new currency notes. So that's nowhere near 50% of what's been taken out. But then if you say that of that 15 lakh crore, about 4 lakh crore was actually just sitting in people's homes and never came out of their vaults, then you can make whatever assumptions you like about how much money was stashed away and correspondingly reduce your own target for how much money is needed to come back into the system. Remember that by their own admission, in the initial phase they've been focusing on getting out 2000 rupee notes because they'll be able to get a lot more of cash into the system quicker. But this can't be sustained as they themselves said. We're going to now start focusing on the 500 rupee note. Did it never strike the government that if you want to use the 2000 rupee notes effectively, you actually need 500 rupee notes otherwise it really doesn't enter circulation? Well, it seems unbelievable that nobody in government could figure that one out. It's plain common sense that you can't have a 1 to 20 ratio between two consecutive notes. So if you take out the 500 rupee note, you essentially have a 2000 rupee note and the next level is a 100 rupee note. I think part of the problem is also that this obsession with secrecy I suspect meant that very few people were in the know. So it's possible that if more people had been involved in planning the exercise, somebody would have had the common sense to point out that you can't have a system operating solely with 100 rupee notes and 2000 rupee notes with nothing in between. You were talking about it before we had the interview about the fact that we are now using our credit card for small value transactions. For the big value transactions you are using the 2000 rupee notes. Exactly the opposite of what would normally have been happening. Normally you use cash for small value transactions like buying a packet of cigarettes and use the credit card for larger transactions. But now because the 2000 rupee note seems pretty pointless, there's hardly a place where you can get change for it. You use it wherever there is a large transaction where you think you can get change for it. What is the, if circulation of money has dropped and with this 2000 rupee notes and 100 rupee notes, what's really happening is the circulation of money is really slowing down. What is its likely impact on the GDP? Particularly if we take the, that it is going to take at this rate at least another 3 months for the system to put back the cash. First let me point out that the denominations are not the only thing reducing the circulation of money. The circulation of money is getting reduced also because of the normal reaction to any shortage of anything. If you believe something is in short supply and that you won't be able to get hold of it in a hurry tomorrow, the natural tendency is to say let me keep some in reserve. So what this demonetization has actually achieved is that in most honest taxpayers' homes there's a lot more cash today than was ever the case before the 8th of November because it's elementary common sense again, I mean which as you say is rare, that if I feel I cannot, let's say I have an emergency in the middle of the night, in a normal situation I would have said no problem, I'll just go to the nearest ATM and withdraw the money. But today I know I can't do that. So I need to keep a stash of cash at home to protect myself against possible contingencies. Now if you think about the arithmetic of it, we have GDP of about 135 lakh crore, which was operating on the basis of cash of about 19 odd lakh crore, right? So you have a 1 is to 6, 1 is to 6.5 kind of ratio between the GDP and the amount of cash. Which means each note theoretically was reduced 6 times. If two things happen, one, the amount of money available goes down and B, the number of times it goes around comes down, you can see the effect of that immediately. So instead of 19 lakh odd crore going around 6 times, if you have let's say 14 lakh crore going around 5 times, you immediately reduce the GDP by that much. So almost it would be by this calculation would be almost a 30% to 40% reduction of the GDP. See, it's anybody's guess how much the drop would actually be. Because a lot of it is not cash, so that transaction will still remain. So those transactions will still continue. But also what you are seeing right now are first order effects, right? Let's take the issue of the GDP issue. About 40% of the transactions were in cash in the Indian economy. Would that figure be right? Roughly. Again these are estimates. These are estimates. So effectively a sharp drop in those would have taken place. Exactly. So which means that there is one level of chilling effect in terms of the transactions themselves becoming relatively much smaller. So that itself would be a 20% reduction for the 6 months in the GDP if this continues. And one needs to remember that there is a distributional effect to this as well. I mean who are the people who are most affected by cash transactions coming down? Those who have no option but to deal in cash. Clearly this applies far more to the poorer sections than to people like you and me who have things like credit cards and debit cards which we use for things other than withdrawing money from an ATM. So it's not only a decline in overall economic activity, it is a decline in economic activity that particularly targets the poor. This instead of targeting the rich as Mr Modi said this seems to have at the moment targeted the poor much more. Absolutely. But looking at the GDP effect, there is also the second order effect. If for instance like shortage, if there is an expectation that there is going to be slowdown in the economy then you don't buy. Do you see that effect also taking place? Absolutely. Absolutely. You don't buy and because there is an expectation that there will be a slowdown in the economy, companies don't invest, they don't anticipate future demand and therefore don't invest for that. And then it becomes a self fulfilling prophecy. If everybody holds back in the expectation that others will not spend then of course it becomes a reality that the economy is a whole spending a lot less. Do you think that this measure has in fact initiated a recessionary situation in the Indian economy? I think there is very little doubt about that and there seems to be a popular misconception that this is a temporary problem that is created by cash being in short supply at the moment and the moment you have the cash back things are going to get back to normal. It doesn't work like that. It's like if you've got a car travelling on an expressway 200 km per hour and you slam on the brakes and bring it to a dead halt, you aren't going to go back to 200 km per hour the next second. It's not going to happen. So that applies as much to an economy. The last point, Mr Jaitley, our finance minister has been talking about how banks will be able to lend because they have more cash. Now assuming that people don't take back the cash which they have deposited in the bank even if making the assumption, who's going to borrow if there is no demand in the economy? Absolutely. As I said, if as an industrialist, if I believe that the demand for my goods is actually going to slacken, not improve, what am I borrowing for? What will I do with the money I borrow? I still have to pay interest on that money and if I don't expect to earn a return on that money which is higher than the interest I have to pay, I have no reason to borrow. Mr Jaitley is a good lawyer. Mr Modi may be a good administrator but there doesn't seem to be any willingness to listen to elementary economic wisdom. What thing is happening in the government? We haven't heard anything from the economic advisor. We haven't heard anything. It's amazing that something that involves such major changes in currency regulations, you've heard hardly anything from the governor of the Reserve Bank of India. I mean ultimately it's the Reserve Bank which is responsible for regulating the supply of money and you've heard nothing from them. So yes, the sense one gets is that, I mean let's leave the quality of, the possible quality of advice they could have got aside for the moment. I don't think it would have mattered because I don't think anybody is in a mood to listen. I think these are decisions taken on the basis of political gambles where the economic rationale behind it is not particularly important. The fact that matters is that if you look at the government's own statements on the rationale behind this move, it's changing by the day. It started off with the very first line of the RBI press release on the 8th of November and the Prime Minister's address to the nation spoke about terror funding, counterfeit money. It was supposed to be a dead blow to those things. You don't hear anything about it anymore. Then it turned out to be about curbing the black economy. Now you don't even hear about that anymore. All we now hear about is digital and cashless. Well, people are cashless. I mean that's why they are in lines because they are cashless. I don't know why he's exhorting them to become even more cashless. In retrospect, this seems to not only be badly thought out, badly executed, but the continuous slew of notifications coming out seems to be they really don't know what they're doing every day trying to try out something new. Absolutely. The sense you get is that each day there's a knee-jerk reaction to a specific crisis that they seem to have discovered that morning. So you get up one morning and say, oh, hang on. Apparently it's wedding season now. We need to do something about that. Then somebody else gets up and says, you know, there's sewing going on at the moment. So they say, oh, sewing? Okay, fine. Let's allow old cash to be used for sewing and so on and so forth. Thank you very much, Shankar. Any last words on the subject? What do you think this is going to turn out politically? I think the last word is going to be heard in UP and Punjab. And I suspect it's the last word which the BJP won't particularly like. Thank you very much, Shankar, to have you with us. And we will come back to you with the issue of the digital economy. Thank you very much.