Interview: Utsa Patnaik

‘Government has confiscated the poorest sections’ wages and working capital’

Print edition : December 23, 2016

Utsa Patnaik. Photo: T.K. Rajalakshmi

"It is impossible for anyone to have the data to say at this point of time that the rabi... acreage is higher than last year." Photo: Mallikarjun Dannanvar

"The threat of [income tax] scrutiny appears to be tailor-made for future witch-hunts in which the government's political opponents can be selectively picked out and victimised, much as happened during the McCarthy eara in the U.S." Photo: K. Gopinathan

Interview with Utsa Patnaik, professor emerita of economics, Jawaharlal Nehru University.

THE FALLOUT of the decision of the National Democratic Alliance government to demonetise currency of higher denominations has been felt across all sections of people. There are concerns that it will lead to an overall economic slowdown given the acute shortage of currency for industrial and agricultural operations. The impact on agriculture and those dependent on agriculture has been gradually unfolding. Utsa Patnaik, professor emerita of economics, Jawaharlal Nehru University, spoke to Frontline on the devastating impact the decision has had and is likely to have, both in the short and the long run, on people and the economy as a whole. Chances of an economic recovery, she felt, were bleak. Excerpts from the interview.

It has been nearly three weeks since the government announced its decision to demonetise 500 and 1,000 rupee notes. The impact has been felt differentially across society. Could you comment on the move and its likely impact?

Let’s first talk about the rationale. The stated purpose is unearthing black money and punishing those who are guilty of generating and keeping black money, and it is supposed to hit terror funding as well as counterfeit notes. Terror funding and counterfeit notes have to be tackled directly through patient intelligence gathering and firm action, not by treating the entire population as potential criminals. As regards black money, exact numbers are problematic, but the government itself admits that of the estimated income which is not declared for tax purposes, hardly one-twentieth is held in the form of cash holdings in excess of normal requirements. Certainly, there is income generated in illegal activities, or in larger-scale legal activities by the well-to-do which may not be fully declared in order to evade tax, but it is a continuous flow of income mixed up with the declared income from legitimate activities and the income of the majority of the population, which is in any case too poor to pay direct tax. Most of accumulated past undeclared income with the rich is invested in land, gold and jewellery or held in accounts abroad.

The measure of declaring as worthless over 86 per cent of money in circulation without making any preparations at all to quickly replace the notes is an extremely foolish move without parallel in any country in the world. There is no point in saying fatuously, as many do, that it is a “bold and dramatic” move. If you push almost your entire population over a precipice, that is a bold and dramatic move but it is also a criminal move. The small elite which has ample money in bank accounts and uses credit cards in large-scale retail outlets is relatively unaffected. The adverse impact has been felt essentially on the entire unorganised sector—agriculture, small and medium industry and on traders and retailers. The very meaning of a country being poor is that the major part of the workforce and population is not in the organised economy.

Because of a quarter century of neoliberal economic reforms, the segment of the workforce which is in the organised economy has itself come down—of close to 450 million persons in the total workforce, 93 per cent are in the unorganised sector. Everyone knows that this sector operates on the basis of cash dealings, and this makes sense because the transaction costs are low—an employer pays workers directly in cash on a weekly, or even daily, basis where casual labour is involved, and the workers immediately spend to meet daily subsistence needs. What is the point of intervening with a compulsory bank account where first the money has to be deposited and after that the worker has to spend time to withdraw it? It increases the transaction costs for both the employer and the employee. Agriculture, small- and medium-scale enterprises and almost the entire chain of supply and distribution of goods fall in the unorganised sector for which cash is the lifeblood. If working people in this sector have some little savings they wish to hold in an interest-bearing account, it is their choice; they cannot be forced into it.

The maximum employment outside agriculture in our country is provided by labour-intensive small manufacturing, especially textiles, which has a large export contribution as well. Consider the effects of the foolish move of extreme demonetisation on the small- and medium-scale enterprises ranging from the textile units of Tirupur to the tile manufacturers in Gujarat, to export-oriented garment manufacturers in Gurgaon and to hosiery units in Punjab; there are lakhs of such small- and medium-scale units that necessarily hold anywhere from Rs.20 lakh to 80 lakh per week as working capital. It is absolutely bona fide for an enterprise to keep several lakhs in cash as working capital because it has to purchase raw materials and pay out wages to labour to keep its output flowing.

By demonetising to an extreme extent, the government has at one stroke deprived these units of working capital. After their existing raw materials and wage fund is used up, they have been forced to lay off their workers, who are returning to their villages. There is nothing for them there, but they can share hardship and help each other survive.

As an economic policy measure, how sound do you think this move has been?

There are issues of legal and constitutional basis for such an extreme measure. Demonetisation is one thing—one can demonetise 10 or 15 per cent of the currency. But declaring over 86 per cent of the currency to be worthless is qualitatively different and has no precedent outside war conditions. Notes are just bits of paper without intrinsic value. It is their acceptance by society that makes them function as money. Every note barring the one rupee note—and including the 500 and 1,000 rupee notes which have suddenly been declared to be worthless—carries the guarantee and signature of the Governor of the RBI [Reserve Bank of India]: I promise to pay the bearer such and such amount. Now what does this mean? Of course, notes are not convertible today into metallic pieces with intrinsic value for exchanging against goods. This guarantee from the RBI, the highest monetary authority, basically says that the note gives purchasing power over commodities and services. The note is a liability for the RBI and it has violated the guarantee on its own notes. It has confiscated the purchasing power which has been earned by the people themselves and has not substituted it with new notes replacing purchasing power, except to the extent of less than one-eighth of the value rendered worthless—a trivial fraction after three weeks of struggle by people to take out their own money. The Governor of the RBI, on the arbitrary directive of the government, is reneging on the promise made to every Indian citizen.

Yesterday I went to the bank to withdraw money. Although Rs.24,000 is the amount allowed, in the absence of enough new notes, my local SBI branch has itself introduced rationing and for a week now has been giving only Rs.12,000 per week per account. Some of the very soiled Rs.100 notes I was given have transparent tape holding together the torn parts! This sum will not pay even half the amount I owe my domestic service providers, and it leaves nothing for one’s own daily small expenses. The announcement by the Governor of the RBI that people can now take out more than Rs.24,000 is nothing but a cruel joke. The supply of money is not restored, yet empty announcements are made.

The principle that I can freely access my own money is being violated by the banking system owing to the arbitrary measure imposed by the government, and this is a very serious matter, for the trust of the public in the country’s monetary and banking system has taken a severe blow. It is another matter that a large part of our public has been kept uneducated by cutting down on expenditures on literacy and education, and this part of the public is not aware of its own constitutional rights. When a political leader with oratorical skills tells them that all this is for their own good, they tend to believe it until their own experience tells them otherwise. In reality, the damage actually inflicted on the Indian people and the economy by this single ill-conceived measure is beyond the wildest dreams of the most rabidly anti-Indian of organisations we can think of.



CONTEMPT FOR KNOWLEDGE



There is a move to downplay the impact on the economy. What would be your assessment?

The damage to the economy is obvious to qualified economists. It is an artificially induced, completely avoidable economic recession. On the one hand, it is reducing output by confiscating the working capital of producers and traders, and on the other it has sharply reduced mass purchasing power, which is being restored far too slowly because not a single problem was anticipated or planned for. It is very clear that the government has a complete contempt for knowledge and scholarship; it is not only clueless itself on macroeconomics, but it has hastened to get rid of professionally qualified people who have the independence of mind to give it good advice. Incidentally, even the colonial government had insisted on sending its highest-ranking civil servants for training in economics in England before they started administering a vast and complex country like India.

One of the arguments given by the government is that the move will help raise taxes that will ultimately be spent on people in the form of expenditure on public utilities such as health and education.

This argument reflects monetary illiteracy. The power to spend their own earnings has been arbitrarily withdrawn from the people, and the government itself is saying it will take a considerable length of time to put it back. Further, production is being reduced both owing to loss of working capital as well as forced reduction in demand. Indirect taxes are bound to go down.

The provision that only Rs.2.5 lakh of old notes can be deposited without raising questions makes no economic sense as the legitimate weekly working capital of even the smallest labour-intensive enterprise such as in textiles, or a trader’s working capital, will easily be a multiple of this amount. By threatening the public that any deposit in excess of Rs.2.5 lakh will come under income tax scrutiny, [the government] in effect is treating every honest citizen, producer and trader with contempt as a potential criminal. There is no logical or economic basis for saying that deposits in excess of Rs.2.5 lakh represent black money: all such a claim represents is the government’s own illiteracy. If it does use brute force to tax these amounts deposited, this will amount to arbitrary confiscation of citizens’ income, whatever the legal garb under which it may be concealed.



ECONOMIC ILLITERACY



The government has been at pains to point out that any deceleration in growth rate will be in this quarter and that there will be a surge in subsequent quarters.

This is economic illiteracy. People who are saying this are irresponsible and do not seem to know any economics. On the other hand, the professionals whose business it is to make a realistic assessment of the situation are saying that the impact on the economy is going to be serious, a one- to two-year dead loss to the economy apart from the phenomenal burden of underconsumption that has been put on an already very poor population. Those who have made the calculations on various optimistic scenarios estimate that there may be a drop in the gross domestic product [GDP] of between 2 to 2.5 per cent. That absolute drop may not show, however, in the government’s statistics. The professionals who advise people abroad on how to invest their money in the country—and they have no stake in making tall claims as they do not contest elections—are saying that there will be an absolute drop in the GDP.

There are those who say that the rural economy, agricultural output, etc., will not be affected and that the acreage of the rabi sowing has not shown any drastic decline because of unavailability of currency to purchase seeds and fertilizer.

I am amazed that within two weeks of demonetisation they miraculously know exactly how much acreage has been sown. The rabi season sowing is still in progress and is in its early to middle stages. The economists who say this do not seem to know the difference between rabi and kharif. I saw some reports which say that the rabi crop is being marketed! It is impossible for anyone to have the data to say at this point of time that the rabi crop acreage is higher than last year.

There have been reports of a dip in the prices of vegetables and other agricultural produce. There are reports of distress selling.

For those who have their vegetables ready and who are taking them to the market, there has been a large drop in prices. The wholesaler who purchases from the farmer has effectively lost his working capital and has no or not enough new money to pay the truckers for transport or for paying the farmer. Naturally, the produce lies rotting in the fields. As far as the consumer is concerned, with the immediate sharp drop in purchasing power, as total demand and consumption has also fallen, there is no rise in prices. If purchasing power is not restored quickly, retail prices may fall; while if purchasing power gets restored faster as compared to the working capital of the traders, prices may go up. The government has so far restored only one-eighth of lost purchasing power. Deposits of old money are not what should be looked at, but how much new money has been issued, and this is minuscule compared with the values rendered worthless by fiat. The scenario is very grim from a monetary and economic point of view.

The idea is that this is short-term pain for a good, long-term objective. How sound is this idea itself?

Even if we give the government the benefit of the doubt, this measure is going to be totally ineffective. Every schoolchild knows by now that black money is not stacks of money kept in gunny bags but is in flow and generated by illegal and legal activities of which the illegal activities are a tiny proportion. As a former Deputy Governor of the RBI has pointed out, all notes are white; it is specific activities generating large-scale undeclared incomes which are “black”. Yet, the middle classes as well as those who engage in legitimate activities are being threatened and treated as criminals by [the government] saying that if one deposits more than Rs.2.5 lakh, one will come under the IT scanner. If there is a legitimate businessman who needs Rs.40 lakh weekly to pay his employees and obtain raw material, why should that come under the IT scanner? Further, who will scrutinise the Income Tax scrutinisers? The threat of scrutiny appears to be tailor-made for future witch-hunts in which the government’s political opponents can be selectively picked out and victimised, much as happened during the McCarthy era in the U.S.

The government says that the taxes collected will be spent on public utilities, the ostensible larger good.

It raises enough taxes already to spend on education and health, but it has been cutting back on rural development and the social sector. Even if it raises more taxes, there is no guarantee that the people can believe in, that there will be more spent on the social sectors, when the government has already violated the basic guarantees that underpin the smooth working of the economy and has plunged it into chaos.

There is an ongoing agricultural crisis in the country, and there have been estimates about the impact on rural incomes.

I would call it an ongoing depression in Indian agriculture, rather than crisis, a term I reserve for the situation in the export crop sector. The government has for a long time, since 1991 onwards, brought down rural development expenditures; it made credit more difficult for people to access. From the late 1990s, it exposed farmers to global price volatility by removing protection. Fluctuations of global prices, particularly for cotton, tea, coffee and so on, have been a major factor behind farmer suicides. That general depression and specific crisis in export-oriented crops continue.

On top of that, the government has now in effect confiscated the wages of the poorest segment of the population; it has stolen much of the income of the farmer and imposed a phenomenal burden of loss of purchasing power. The daily wage worker, the wholesaler and retailer of goods, the farmer, the service providers’ sector, the government has taken away their income and confiscated their working capital, to date to the total net extent of over Rs.12 lakh crore.

It is a completely mindless measure carried out without preparation to mitigate the consequences. It is not just imposing temporary pain—it is actually forcing people to part with their assets. The unemployment rate is shooting up. Rural labourers or small farmers will have to mortgage their tiny assets to survive. Already an exodus of urban workers is taking place to villages.

It is not so easy to get the economy back on track once it is derailed. The labour-intensive small and medium enterprises, which are the [country’s] biggest employer and foreign exchange earner, are already being forced to close down. They do not know how long it will take for cash to be reinfused into the economy. When enterprises are shutting down, output is going down, how can anyone say that manufacturing will not be hit? Similarly, those who are saying the rabi crop will not be affected do not even know what a rabi crop is as opposed to a kharif crop. Rural cooperative banks were not permitted to exchange old notes and are still not doing so, so the situation of farmers remains dire. The government agencies by now supply a very small proportion of seeds and fertilizers, and the private suppliers will not take old notes in any case, so the farmers’ sowing plans are getting delayed.

What is your opinion on the role of the RBI in this matter?

Unfortunately, the RBI has almost always functioned as an instrument of the government, including of oppressive government policy. I have recently researched a paper on the Bengal famine of 1943-44. The British wanted to raise money to finance war expenditure in Asia and put the entire cost on the Indian revenues. The total budget spending in India rose sevenfold between 1941 and 1944, and three-quarters of increased spending was met by the RBI printing notes against a mere promise of sterling payment later. Prices rose from three to five times in 18 months. The expenditure to feed the people employed in war industries and Allied troops was effectively met by brutally reducing through deliberate inflation the purchasing power and consumption of the poorest of the rural poor. As a result, three million people died in Bengal. The RBI functioning as an instrument of British imperialism did what it should not have done as a responsible monetary authority—that is the blot on the history of the RBI under colonialism. In order to pursue the present move dictated by the government, the RBI has once more abdicated its role as a responsible monetary authority.

A letter from the Editor


Dear reader,

The COVID-19-induced lockdown and the absolute necessity for human beings to maintain a physical distance from one another in order to contain the pandemic has changed our lives in unimaginable ways. The print medium all over the world is no exception.

As the distribution of printed copies is unlikely to resume any time soon, Frontline will come to you only through the digital platform until the return of normality. The resources needed to keep up the good work that Frontline has been doing for the past 35 years and more are immense. It is a long journey indeed. Readers who have been part of this journey are our source of strength.

Subscribing to the online edition, I am confident, will make it mutually beneficial.

Sincerely,

R. Vijaya Sankar

Editor, Frontline

Support Quality Journalism
This article is closed for comments.
Please Email the Editor