"Only an authoritarian government can calmly cause such misery to people," said Nobel Laureate Amartya Sen on the government’s demonetisation move. Concurring with this thought Amit Mitra, Finance Minister of West Bengal said no democracy with a money market has withdrawn 86 percent money from the market.
Mitra said FMCG sales have fallen by 35-40 percent. About 70 percent of secondary steel plants in West Bengal are not working after demonetisation. India is seeing recessionary tendency due to this move, he added.
It will take six months for the government to remonetise the economy, Mitra said. Economists have also agreed that gross domestic product (GDP) will decline by 100-300 bps due to demonetisation.
Joining the crusade against the currency ban, Mitra said the government was not prepared to implement this scheme. Due to the cash clean-up, informal sector in all states is in deep trouble, he said.
On deposits made in Jan Dhan account, he said for political purposes government had leaked that West Bengal ranked number one when on the contrary, the state is ranked number 10.
Talking about the Income Tax Amendments Bill announced by the government on Monday, the economist said the government has admitted its failure by introducing an amnesty scheme for the black marketeers.
Mitra, who is also the Chairman of the Goods and Services Tax (GST) Panel, said the indirect tax regime is the biggest fiscal reform in the country and it not a tax rate issue.
Since the roll-out of the demonetisation scheme, there are serious concerns over GST rules. The scheme is a second whammy for the states, much bigger than GST process, Mitra said.
Below is an excerpt of the interview.
Q: You are an economist, you have dealt your entire life with numbers, with data. Let me ask you about the economic rationale, the economic argument for opposing demonetisation?
A: Let me first start by saying has any country in the world which has a democracy and a market economy done an 86 percent money withdrawal from the market? The answer is no. Since you ask me as an economist Larry Summers Professor at Harvard, what does he say? By the way he has been working towards withdrawing the USD 100 notes in the United States. On a gradual basis. He says chaos, loss of trust in government. What does Dr. Amartya Sen, Nobel prize winner in economics, since you ask me about economists what does he say? Only an authoritarian government can calmly cause such misery to the people. What does Kaushik Basu at Cornell University and in the World Bank say? Very deeply concerned, disagree. What does Ajay Shah say, who is a monetarist economist. People would think maybe he is in favour of this. You know what he says? He says that if you have an aquarium of fish and you are some kind of a carnivore that you convert the aquarium of fish into a fish soup you can never put the soup back into the aquarium. It is not possible.
Let me give you some example. You take simply as your readers would see, Fast-moving consumer goods (FMCG), biscuit falls by 40 percent, salty snacks by 35 percent. Let me go to another area that normally people don\\'t refer to which is secondary steel which is very important for Bengal. Do you know 70 percent of secondary steel plants are closed. Now you go to the power loom in Maharashtra. 70 percent of the power looms are closed and Bihar, Uttar Pradesh (UP) and Telangana workers are going back to their states. You take diamonds in Gujarat, do you know that 70 percent of Bengali workers in Gujarat who are very large in number in the diamond industry are all coming home. What does that mean? That means there is a distinct case of a recessionary tendency which is substantiated by this data.
Let me give you one more. You would surely respect Centre for Monitoring Indian Economy (CMIE). What does it put out? You know what CMIE finds by research transaction cost of demonetisation is Rs 1.28 lakh crore and this is only 50 days.
Q: We have had Mahesh Vyas saying that it will have an impact of Rs 61,500 crore only by December 30 on the business and enterprise sector and they have factored in Rs 1.28 lakh crore as you rightfully pointed out. I am aware of these numbers, I am aware of the economic arguments against demonetisation, I had Larry Summers co-author on my show Natasha Sarin talking about why they have raised concerns about demonetisation. But the fact of the matter is that the government has decided that there is going to be no roll back. The government has decided that they will go through, the Prime Minister has asked the country for 50 days. I want to now specifically ask you about whether you believe this disruption that you talked about, you talked about steel mills, you talked about FMCG, you talked about informal sector. West Bengal has large informal sector. Most other economists that we have been speaking to while acknowledging that there will be disruption in the short term even to supply chains believe that it will perhaps start to pick up in 2-3 quarters. You are saying that disruption will be much more long term?
A: What happens is if you have a recessionary condition and disruption for 2-3 quarters as you say the entire supply chain comes under risk. It takes longer for a country to get back on its even keel. I will give you an example 3 billion notes can be produced a month by the government if it is three shifts a day 24/7. Now how many notes do you need, Rs 500 notes to get back into the market? You need 17.5 billion notes. That itself gives you an idea that it will take six months to put back the notes that you have eliminated in the market place.
Two, I was shocked by the fact that the government admits its failure by introducing an amnesty scheme for the black marketers saying that you come and give you black market money and we will tax you this much etc, no thoughts. No scenario building. I have never seen a government. You know which countries have done this. Six countries have done this when there were dictatorships. Russia has done it thrice, Zaire has done it. Countries I can list to you, Ghana has done it and everyone of them failed. So, my question is when you demonetise 86 percent of your monetary circulation we call it MV=PY, money multiplied by velocity. You have withdrawn from the system 86 percent of the money. This has never been done in a democracy with market economy.
I will give you one more example. Take the case of UP. 66 percent of the gram panchayats of UP do not have banks. Where are we living as middle class educated people, we don't have contacts with them. Do you know what the number is in Bihar? 63 percent.
Q: You talked about UP, you talked about Bihar but the government of Bihar is supporting this government. The government of Bihar, the Chief Minister of Bihar Nitish Kumar is supporting this government. It is in fact Mamata Banerjee in Patna today who is opposing this but Nitish Kumar is supporting the government's demonetisation drive.
A: Right now I want to keep politics out of it. You asked me a question as an economist. After five years of working in Bengal towards opening banks in gram panchayats we still have 21 percent of our gram panchayats much better than other without banks. Where are we living. We live in cities, we live middle class lives, we use credit cards, we use electronic process and overnight we think the entire India of common people and my constituency I know where poor people live, overnight there is going to be a change and the way it is being done it is - undoubtedly Amartya Sen I don\\'t agree with him every time but he is absolutely right. This is dictatorial in the sense that overnight you do it and then you start reversing yourself one particular day 14 changes were made. Obviously no preparation. Obviously no clarity. Which economist was consulted for this, I would like to know. Was the chief economic advisor consulted, I doubt it. Forget other nobody is consulted. 3-4 people run the show. This looks like Zaire to me. This looks to me like Libya where you don't need to consult anyone.
Q: The Prime Ministers argument there is that this was a massive operation and hence required utmost secrecy and which is why only a handful of people were in the know. Let me talk to you about the impact that we have already seen. It has been over 20 days now since November 8 notification came in. You were talking about the impact on the informal sector. Tell me about what is the situation in West Bengal in terms of job losses? We have been trying to illicit data from the government, we haven’t had much luck, tell me at least about your state, what has been the impact as far as job losses are concerned?
A: Job loss is connected to production. I have already demonstrated to you, not only in West Bengal, all over the country, I am talking about organised manufacturing, I am not talking about informal sector only.
Informal sector today is in huge trouble. West Bengal has informal sector. By the way 80 percent to 90 percent of India in terms of employment is from informal sector. The data may wary between 80 to 93 percent. 20 percent of India\\'s GDP is produced by the informal sector and we just wish it away or they don\\'t matter.
Now go to agriculture, I would like to ask you when you are finishing your khariff crop, you have sell it, you are going to plant mustard, you are going to now go to the rabi crop, what do you need? For the rabi you need fertiliser, you need all these ingredients and you have no cash. Where do you think the farmers are going to get this money from? They are going to all use some mobile phone to get money? This is the limit of imagination going amuck. We middle class people stand here and believe it because we use the cell phone and we use the electronic process. India is not us, there is another India which is in very serious trouble and many of the middle class people are as well in trouble.
Q: Once specific charge that the government is making which pertains to your state and that is the surge in deposits in Jan Dhan accounts. I am going as per reports, reports seem to suggest that prior to November 8 you had about 44094 Jan Dhan accounts or zero balance accounts and you had deposits to the tune of Rs 6286 crore. Now the government seems to suggest that West Bengal leads the country in the rise in deposits in Jan Dhan accounts. It would be naive to suggest that this black money. However can you give me some sense of the surge in deposits that we have seen in Jan Dhan accounts and also the actual number of Jan Dhan accounts in West Bengal?
A: Let me correct your perception, the government spoke of this sometime ago as a leak that West Bengal is number one. Do you know what the latest figure says, kindly check it up, West Bengal is 10th in number. The spurt has been 70 percent in India on average, it has been only 42 percent in West Bengal. So, this is the data we have got.
What is amazing is you quietly put a leak politically saying West Bengal has huge thrust in Jan Dhan accounts or black money, the truth is we are 10th today according to today's data and average spurt has been 70 percent, West Bengal is 42 percent.
Don't forget economists have argued that this is a transaction money that the small and medium and informal sector was holding which they perhaps put back into the bank. I can\\'t say all of it or none of it is black money or held by somebody but economists argue that states with large agricultural sector, with large informal sector, with large, small and medium enterprises, by the way West Bengal is number one in MSME bank lending today in India. So, that fits in with that economist perspective. Therefore my submission to you is we are 10th in number and not number one. This was quiet political leak done by somebody. We have 42 percent of spurt when India\\'s average is 70 percent. Please testify and check the data. I have managed to get the data.
Q: You are the chairperson of the empowered state finance ministers on GST. So, far the GST council has been very smooth in its functioning. In fact we assumed that the winter session was going to be about the GST bill being passed but it is now about demonetisation. Do you believe demonetisation has derailed the goods and services tax?
A: When we went into full force and Mamata Banerjee in her manifesto supported GST. I was elected as chairperson of the empowered committee of finance ministers, worked avidly for it, what was the assumption? The assumption was there is going to be a fiscal destabilisation. For how long? Upto 5 years, definitely 2-3 years. Therefore we asked for compensation of the state revenues from the centre for 5 years and the centre agreed and put it in the constitutional amendment. Later the union finance minster suggested in the GST council, upto 14 percent rate of growth of taxes, whoever does not achieve we will compensate them and all this under the assumption that there is going to be a massive fiscal destabilisation and we have to address it head on and for that we developed the whole model. All of a sudden comes a second whammy of demonetisation which is a much bigger process than the GST process. GST is fundamental, this is temporal which moves towards a recession. You tell me, any logical person, when you expected a destabilisation of the fiscal structure, you prepared for it, you sought compensation, we all agreed and then without any understanding or notice, without any preparation suddenly comes this dictatorial process of 86 percent demonetisation. My question to you and your viewers is, can we face these two destabilisation processes simultaneously for the common people, for the small business, for the medium business, for large business, for governments themselves? I have to take away several directorates of taxes because of GST, there will be no service tax, there will be no other kind of tax, only one GST. Now all this change is going to happen, we are going to absorb it, we are going to get compensated, all this has been worked out and suddenly comes like a hammer demonetisation which is a big destabilisation.
Q: What now then because the GST council is meeting to deliberate on the draft GST law on December 2 and 3. If I hear what you are saying, it seems to me that you would not like to take this process any further at this point in time?
A: I can only say that I will have to talk to my other colleagues, senior finance ministers to understand whether the state revenues can survive or not. The figures I gave you about closing of industry, what does it mean for revenues? Revenue will steeply decline.
I have seen a study done by Telangana government which is not Bengal, that they will lose 20 percent of their revenue due to demonetisation which is Rs 10000 crore and only in four items - stamp duty, excise matter and few items like that, not even taking into consideration VAT. So, my question to you is the finance ministers of states will have to sit and think about the fact.
Q: As far as the losses on account of the GST are concerned that compensation is going to be provided for next 5 years, that is guaranteed under the GST law and for which a cess is also going to be imposed on certain luxury items to fund the compensation. However you are saying that, that apart now, either states will want higher compensation or you are going to have to go right back to the drawing board?
A: Let me submit to you, what was the number? Number was Rs 50000 crore of compensation. That Rs 50000 crore compensation to the states, this is without the demonetisation scenario, Rs 24000 crore will come from a cess that the central government puts on environmental cleanliness and the remaining quantum will be put as a cess on cigarettes, pan masala and on luxury cars and aerated drinks, this is what the central government proposed. They expect to collect Rs 50000 crore.
Now given the current demonetisation the tax collection of the states is going to plummet. Let me tell you certain BJP finance ministers after the meeting were very concerned on this, forget us. They said what about healthcare, education, law and order, what about agriculture, all of this in the hands of the states. If our taxes decline because production declines as I have give you data on and central government taxes will also decline. If you have a GDP decline by 2 percent their tax collection will decline and the whole system will come into question as to whether they can compensate the states despite the constitutional process?