In a chat with ET Now, Swaminathan Aiyer, Consulting Editor, ET, says there will be some people with black money who will be trapped but there is going to be huge distress on the behalf of lots of ordinary common people holding Rs 500 and Rs 1000 notes who will suddenly find they cannot use them. Edited excerpts



This seems to be a bold move. But will this have the required result because people do not keep stash of cash at home or in their lockers? What they really do is they put an accountant for wealth in the pipeline.



Let me say that this particular move is going to cause a lot of pain in the short run to everybody. Life is going to become difficult for everybody from the poor to the richest to the “blackers”, to the “whiters’’ – holders of all kind of money. This is deliberate. I think Modi recognises it. He seems to think that at the end of it there will be a net gain.



It is true is that there has been a massive increase in the amount of cash in circulation in the last few years. Some of it will be with people who are using it for various nefarious means for tax evasion and idea is to try and catch them.



But in the process, there are millions of people especially in rural where there has always been a cash economy, there is no cheque economy, no credit card economy. So fact is that you are creating a problem for 100% of the people to catch the top 0.1% of the people. So there is going to be huge distress and uncertainty.



As far as the real economy is concerned, there is going to be huge blow to purchasing power. All kinds of people who were accepting notes are going to refuse to accept the notes and suddenly huge amount of purchasing power will dry up. There will be complete uncertainty on whether or not anybody can accept this note or accept that note.



To try and replace the old notes by the new notes will take a lot of time and in that time there can be a huge fall in sales, very wide variety of items especially those that were conventionally brought.



Rs 500 today is not a large sum of money. There are fruits selling at Rs 500 a kg in some cases. So as such, this enormous distress is being created. Will it result in the stoppage of a large amount of black money? In the long run at a discount of 20-30%, the biggest holder will find various ways of getting rid of this money in small lots and pieces into rural India. There will be some loss but black money will not end.



Let me also say that the notion that you can stop black money just by demonetisation is wrong. You can run out of Rs 2000 note but even more than that there is something called gold coin worth Rs 31,000. I have already heard that there are people who are doing deals in black money in gold coins and not in rupee notes. So if all that you do as a result of this is to greatly increase the demand for gold coins, it is actually a negative for the economy.



On balance, yes there will be some people with black money who will be trapped, who will get impoverished. They may not be able to utilise it because they will lose whatever they have to lose in order to try and convert their money into white but there is going to be huge distress on the behalf of lots of ordinary common people holding 500 and 1000 rupee note who will suddenly find they cannot use them and queue up in front of banks to try and convert these and go through all the paperwork.



There is going to be bedlams in the banks and a bad scene for individuals.. There is going to be a huge fall in effective purchasing power in markets of all kinds. There is going to be huge distress in a large number of households. And yes, of course, there will also be distress among certain amount of black money operators or among counterfeiter or Pakistani agents using it.



Modi is gambling that there will ultimately be such a positive thing saying I have cracked down on black money and counterfeiters that it will offset the distress being caused to the public. I am not sure that is entirely true. As a political gambit, this is a very risky gambit. It is going to cause a lot of pain to everybody. It may even backfire on Modi.







I spoke to a former finance minister just a short while back and the point that he was making is very right. Everybody wants a crackdown on black money. But unaccounted for wealth is not available in cash all across the country. Black money is really in the pipeline and every month the RBI releases the calculation and people have cash balances on their balance sheet. It is all going to be perhaps be water down there. Do you agree with me?



All I can say is that there was a huge increase in currency in circulation, tens and thousands of crores which you are probably aware of and there has been some kind of mist on what is this money and where is it going.



I think, the point Modi is making is a claim that a large number of counterfeiters including Pakistan agencies have been circulating a very large number of Rs 500 and Rs 1000 notes into circulation. I do not know what the figures are. I do not know how large these things are. So there is a mix of various issues – one is black money, one is a counterfeiting, one is Pakistani agencies. There is a mix of all these things going out there into what is the out there in cash. There has been a debate among economist on what is driving this huge increase in cash balances in the economy, the official ones issued by the Reserve Bank itself.



I do not think there is any complete clarity in it. Some people have been arguing that it is the boom in the rural economy, boom in rural wages, higher price of agricultural products have produced this boom. Now if that is true, then trying to crack down on the currency is cracking down on perfectly legitimate agricultural and rural activity.



I really worry that Modi has shot himself in the foot. Suppose for instance at the end of it all, it is true that Rs 100,000 crore of black money in the hands of various guys become inoperative, they are unable to use it any more. Okay. So you have levied a penalty on black money operators. But if in the process, you have inflected all kinds of difficulties and harassment on millions and millions of rural people, what kind of political move is that?



I had a conversation with Baba Ramdev on this issue some years ago. I said these things do not work. Demonetisation has been tried in many countries. It has not worked. And one reason it will not work among other things is that if you really say that you are going to crack down on currency, people will shift to gold. People will say that a gold coin of 5 grams is equal to Rs 15000. So in effect, they have Rs 15000 notes which cannot be demonetised at all and there will be huge surge in imports of gold.



You need to look beyond just a demonetisation. There are going to consequences what will be the reaction of black money people to demonetisation of notes. One answer is let us get away from notes into gold which cannot be demonetised. What will you do then? As I said, the ramifications go far beyond this limited idea that by demonetising a certain amount of currency notes you are solving a problem. The ultimate problem is much deeper one that we are pathetically impotent in stopping illegal transactions of various kinds. The idea that you can make up for that by demonetisation which will cause immense distress in rural areas, immense distress in the hands of all kinds of people who deal in cash, in order to catch that small number of rich people, that small number of rich people are going to get away with a discount of 30-40%.



They will find ways of converting this non-legal tender to legal tender by putting into rural areas and various other things like buying gold or whatever. So to my mind, this is very adroit move. It is covered with risk even of a political point of view, it does not seem to me that Modi has done something very sensible. It is a high risk thing politically and I do think it could backfire.