In his surprise address to the nation on November 8, Prime Minister Narendra Modi pegged the demonetisation of Rs 1,000 and Rs 500 notes as a game-changer in the Centre’s attempts to target the black money economy. However, in the days since 86% of India’s currency in circulation was invalidated, many Opposition-ruled states and citizens do not seem to share his enthusiasm.

Apart from questioning the lack of preparedness and forewarning in implementing such a crucial policy and the distress it has put the common public in, several state leaders have also raised doubts over how effective the demonetisation will be in curbing black money.

Among the critics is economics professor turned Finance Minister of Kerala, TM Thomas Isaac. In an interview to, the Communist Party of India (Marxist) leader said the secrecy surrounding the demonetisation was a blow to cooperative federalism, where the state and centre work collectively, and the move would not have a serious impact on tax evaders. Excerpts:

How does the Kerala government view this sudden demonetisation measure?
The Left Democratic Front government in Kerala is for strong measures against black money. But the measures adopted by the Centre, which has gone for demonetisation of high-denomination notes, will hurt the common people more than the real violators. The same objectives could have been achieved even if the government of India had announced a future date for demonetisation and allowed the market to adjust.

The prime minister is of the view that the secrecy was necessary to stop hoarders from converting their illegal cash.
The objectives of the present move of the Centre are two fold: to flush out the fake currency sponsored by hostile neighbours and to seize black money. With regard to the first, even if a future date was set for the measure, the same thing could have been achieved efficiently. As for the second, studies of income tax raids and such have shown that currency constitutes only about 5% of illegal wealth.

So, even if you give a liberal estimate, the black money in the form of currency wouldn’t surpass more than 10% of the total value of the black economy. Now, to capture this 10%, you have put the entire population into strife and suffering. You are pulling out 86% of liquidity from the economy. India is a money economy. The cash to Gross Domestic Product Ratio in India is 12% as against 3% to 4% in other comparable economies. This will freeze liquidity and by extension, the economy.

Are you witnessing this liquidity freeze already in your state?
Absolutely. You can go to the countryside and see for yourself. Employment in the rural areas has shrunk by half in less than a week as people do not have the money to pay for work. This will have both a short and medium-term impact on the economy. This is why we feel the secrecy around this demonetisation has become a devastating blow. Consumption will shrink as liquidity has been hurt. When this happens, negative impact on growth is inevitable in a cash-based economy like ours.

The Centres argument is that the money that would come into the system with demonetisation will compensate the negatives.
See, if your objective really was to clean up the system of black money, the policy should have been accompanied by certain systemic measures. This includes restrictions on purchase and sale of high-value commodities, import restrictions on high-value goods and so on. Only then it would be possible to rattle the super rich who hoard crores of black money. Purchase of gold, luxury cars, land and other such things should have been made as difficult as possible before embarking on demonetisation.

Another crazy idea which has been announced is the penalty of 200% on money that does not match the income. Under what provision they would do this is yet to be made clear. The fact is, the government has failed miserably in attacking the black money hoarded in foreign countries. This current measure would only help people whiten the black money as it was not accompanied by strict systemic measures.

When were you informed about the demonetisation measure? Did the Centre reach out to you to collaborate on its implementation?
The way this demonetisation was effected is a big blow to the very concept of cooperative federalism. Not just Kerala but most states were kept completely in the dark about this crucial policy decision. Even after the announcement, the Centre has not reached out to the states to understand the problems we are facing. There has been zero dialogue.

What was the immediate impact on your state?
Why should our state treasury be closed because you wouldn’t trust the states? If you won’t trust the states, whom are you going to trust? For example, we have a strong structure of chit funds in Kerala run by the government. They have a turnover of over Rs 20,000 crore. Transactions in this area are now virtually closed. So are state lotteries. Thankfully, we have the treasury linked to banking in Kerala. But I do know there are states which have not completed this measure. I am surprised as to how they are coping with this shock.

Worst case is Kerala’s primary cooperative banks. They have not been brought under the Reserve Bank of India regulations. Only our district cooperative banks are. But the role of over 3,000 primary cooperative banks in the Kerala economy is as important as that of the commercial banks. The entire sector has been ground to a halt as the RBI after demonetisation has not allowed unrestricted withdrawals by these cooperative banks from their accounts in the commercial banks. These are certainly not in the spirit of the federal structure. Despite representing to the Centre, we are yet to get an answer on this issue.

Kerala is heavily dependent on money sent from abroad. How will the demonetisation affect this?
The remittances flow is almost 90% through the banking channels. But the effect of this demonetisation will be the cold feet developed by those remitting the money. Now with all this turmoil, the workers and others abroad would feel it was better to hold on to the money than moving it here. Like I said earlier, such developments will have a serious impact on the economy in the medium term. The tourism sector has also been hit.

There is also a view that the demonetisation could improve liquidity in banks and thereby help boost the economy.
I don’t think this demonetisation would bring in so much cash as to shore up our languishing banks. For that to happen, you need to go after the big sharks who owe the banks millions. We think that this measure was purely aimed at the opposition in Uttar Pradesh. The Bharatiya Janata Party took an advantage since they knew beforehand about this decision. I would say this is demonetisation of the opposition in Uttar Pradesh, for winning the election, for which the BJP will do anything.

West Bengal Chief Minister Mamata Banerjee wanted the Communist Party of India (Marxist)‘s cooperation in targeting the Centre over the demonetisation. Why did the party refuse?
You need to understand that there are complex political factors at play in West Bengal. But since this is an issue of great importance to the public, the CPI (M) will raise its voice strongly and loudly on the floor of the parliament along with other parties.