India’s first chief statistician, Pronab Sen, is now country director of the International Growth Centre, which seeks to build effective growth facilities through engagement between policymakers and researchers. In this interview to, he speaks on the 50 days of demonetisation, its failings, its severe impact on the poor, the loss of credibility of the Reserve Bank of India, the push to make India a cashless or less-cash economy, and suggests measures the government could take to rev up the slowing economy. Excerpts:

Much of the old Rs 500 and Rs 1,000 currency notes seem to have come back to banks, perhaps beyond the government’s expectation. Does this imply a large percentage of black money was converted into new currency notes? Or was it that the government miscalculated the amount of black money in the economy?
The government’s estimate of black money and ours was roughly the same – about Rs 3.5 lakh crores. What they miscalculated was the Indian ability for jugaad [innovation]. You had old notes trading at a discount. What was happening was redistribution among agents. I give you Rs 100, you give me Rs 60 and make a profit of Rs 40. But the Rs 100 note remains intact. It is redistribution from me to you, but not to the government.

So what you have is a new category – perhaps it is an old category, I don’t know – of people who have black money. If you look at Jan Dhan account holders, they, technically, now have black money. They didn’t have black money earlier because they weren’t liable to pay tax. But now they have. So you have created a new category of black money holders. And this amount is not unsubstantial. We are talking of somewhere between Rs 2.5 lakh crores and Rs 3 lakh crores of such transfers happening. That means a lot of new black money holders are now in the system.

Could such a thing have been predicted?
We are Indians. At the very least, you should understand your own people. If there’s one thing we are good at, it is jugaad. This was predictable, we knew dalals would come up.

Anecdotal accounts suggest bankers played a role in converting old currency notes into new.
Certainly, people in the financial system have played a role in it. It is difficult to tell to what extent. If you take Jan Dhan accounts, it could have happened in two ways. One is that I, as a black money holder, approach you, a Jan Dhan account holder, and say, “Here is Rs 50,000, put it into your account, and once the new notes come in, you will give me, let us say, Rs 40,000.” In other words, Rs 10,000 will be yours.

And you keep my passbook to ensure I return the promised Rs 40,000?
Yes, I keep your passbook. The second way of doing this is to get hold of the friendly neighbourhood banker and say, “I am giving you Rs 2 lakhs and you will deposit Rs 50,000 each into four Jan Dhan accounts.” The account holder doesn’t even know the money has been deposited in his account. At an appropriate time, the money is taken out.

Either of these two models can work. What the proportions are, again, it is hard to tell.

The government failed to comprehend the banker’s psychology, didn’t it? After all, he or she has been taught to be nice to high-value depositors. It would, therefore, have been difficult for the banker to turn down the request of a high-value depositor.
It would have been impossible. Private bankers have been getting kudos from their clientele because high-value customers are protected. The anecdotal account suggests that a high-value customer would give the banker a cheque in the morning and after 5 pm, once the bank closes, the banker would call him to say, “Please take your money.” However, the people in queues would be told that the bank has exhausted its money.

This wasn’t possible in public sector banks, which played a far more positive role during demonetisation than private sector banks.

But when we see on TV, or are told, that lakhs of rupees in Rs 2,000 notes have been found in a person’s house…
That can’t happen at the branch-level bank. It would have happened at the currency-chest level. (Currency chests are select branches of scheduled banks, which are authorised by the Reserve Bank of India to stock notes and coins on its behalf.

Given the limited number of currency chests, which are shared by banks, would it be possible to statistically identify that this amount was ferreted out at bank X and this amount at bank Y?
I don’t think any such record would have been maintained.

Were no records maintained because of the rush at banks?
The currency chest is an entity of the Reserve Bank of India. From it, money is taken out and given to a bank, not to its branches. The bank then distributes it to its branches. Once the distribution has taken place at the branch level, the money going to different branches is relatively small. Besides, the pressure on them was very high. I don’t think too much of leakage happened at the branch level.

It would have happened at the central bank level – that is, prior to the money getting into the currency chest. Or it would have happened at the bank level, before the money was distributed to its branches.

Would you say the government failed to achieve its goal of flushing out black money through demonetisation?
By and large, the numbers are…

The Reserve Bank hasn’t revealed the amount of old notes returned to banks for nearly a fortnight. Is it because it feels embarrassed?
The Reserve Bank will have to give out the figures, sooner than later. But yes, it is embarrassing because…

The money returned is more than the demonetised amount?

The demonetised amount was Rs 15.4 lakh crores, right?
Yes, Rs 15.4 lakh crores.

Does it mean that even fake money, estimated to be around Rs 400 crores, has come to banks?
It could be a little more than that, but it is still a small amount. What is most likely to have happened is the round-tripping of cash. This means that old currency gets deposited into banks, goes out the back door and comes back in again through the front door – and it is then counted all over again. For instance, I deposit Rs 2,000 in old notes and it is credited to my account. But instead of the Rs 2,000 being locked away, it comes back to me because the bank official is in connivance with me. I submit the same Rs 2,000 again in the bank and the same amount is yet again credited to me.

So the primary goal of flushing out black money hasn’t been achieved?
It hasn’t been successful.

There are a lot of people who are apprehensive that with the Reserve Bank not issuing figures, there is a possibility of it manipulating numbers?
Hopefully not. Look, the Reserve Bank’s reputation has already taken a severe and unwarranted beating.

The Reserve Bank was forced into a position where they had no choice.

But they should have stood up to it?
It is indeed a legitimate question to ask: Why didn’t the Reserve Bank stand up against demonetisation? Nevertheless, we have reached a point where its credibility is at an all-time low. And if hard information starts coming out that they are fudging figures, then that will be pretty much the end of any credibility it has. That would be disastrous for the country, because the Reserve Bank is, in an important sense, the guardian of the sovereign currency.

But the government seems happy. For instance, the income tax department has claimed that Rs 4 lakh crore of deposits in invalidated currency notes are suspect and that they would track their depositors, who might have dodged paying tax?
If they don’t do it, then the whole exercise of demonetisation would be futile. The whole purpose of such an exercise is to identify those whose cash stocks don’t square up with their reported sources of income. That’s how you expand the tax base.

Why would people have deposited this amount if it were black money or undisclosed wealth?
Well, there is a trade-off – you deposit your black money and pay 50% tax, but you get to keep 50% of your black money. The downside of it would be that you perpetually come into the tax net. You then decide which way you wish to go.

I suppose they were hoping they might not be nabbed. In other words, if you aren’t asked to explain your deposits, it is fine. If you are…
The point is if they are asked to explain, they will concoct one explanation or another. Fortunately, tax authorities are a little brighter than that. The depositors wouldn’t have legal ground to do anything about it. In the future, if they don’t pay tax, the authorities can step in.

That said, they are saying these deposits have come from about six million people. That is not such a large number. You already have 31 million people submitting their tax returns. Just one-fifth of that number has been added to it.

The other justification for demonetisation was that it would flush out counterfeit currency through which terror groups finance their activities. Isn’t terror activity more a function of politics than economics? This seems to be the case considering terror strikes continue, for instance, in Kashmir?
Demonetisation is a very good way of handling counterfeit notes. A lot of European countries have done this. But you then target the denomination in which counterfeits are made. I do not know what denomination counterfeits are made in India. Assume the counterfeits are in Rs 100 and I am targeting Rs 1,000, then what is the point? You have to target that denomination – in our example, Rs 100 – and you have to make changes in the new currency significant enough that counterfeiters will take a lot of time to fake new notes. Neither seems to have happened.

What about terrorism?
There are two kinds of terrorism – external and internal, of which the prime example is the Naxal variety.

Where would you put Kashmir?
The nature of terrorism in Kashmir is very different from what you see where the Naxals are strong. As far as Naxals are concerned, they are similar to black money holders. They get their resources through illegal means. Whether Naxals hold Rs 500 or Rs 1,000 notes, I don’t have any idea. I suppose they would require high-value notes to buy arms. We might have been able to tackle that reasonably well.

Insofar as external terrorism is concerned, demonetisation would have changed nothing. In any case, terrorists can get genuine Indian currency from Hong Kong, Dubai, Singapore or London, you name it and you can get as much Indian currency as you like. I don’t see them being particularly affected by demonetisation.

Just as everyone ran out of money, the Naxals would have too.

They would have also sought to convert their old currency notes. They would have asked their cadre and sympathisers to stand in queues and exchange their notes.
Yes, but it would still get complicated.

I suppose because high deposits in the areas where they are would place them under scrutiny.
Yes, that is right.

Conspiracy theorists would say turning India into a cashless or less-cash economy was always the hidden agenda of demonetisation, as the idea of using digital money was built into it. And that it was spelt out unequivocally later only because other stated goals were not achieved.
There is a huge difference between cashless and digital – they are not the same. Digital is part of cashless, but the two are not synonymous. Cashless means I do transactions without the use of cash. I have a range of instruments. At the heart of a good cashless economy is bank-to-bank transfer.

This can be done through cheques. But no one wants to accept cheques because they may bounce and the recovery process is long. The new proposal is even stupider.

Which is?
They want to make a bounced cheque a non-bailable offence. Earlier, you were scared of receiving a cheque. I will now be scared of writing a cheque.

The secretary general of the Federation of Indian Micro and Small and Medium Enterprises suggested in an interview to me that if a person’s cheque bounces, his account should be frozen until the money is paid to the person in whose name the cheque has been issued.
It is a far more sensible suggestion than what has been proposed now. Cheques, fund transfers through real-time gross settlement systems or national electronic funds transfer have no charges. You move to the next level, which is the draft. You pay a commission on it, but the amount is very small. The third (form of cashless transaction) is the debit card. A debit card has a 1% charge on each transaction, which the merchant pays, that is, the guy who is making a profit out of the transaction. If I am paying you for a service through debit card, you are getting less than what you supplied me.

But I will pass the 1% charge to you, include it in my cost.
Something of this kind will happen. Then there is the credit card, which charges about 1.5% to 2% (on each transaction). The argument there is that the credit card company is giving you one month of credit. That 1.5% takes care of two things – it is the interest on the credit given and that the credit card company is bearing the risk. This percentage is not unreasonable.

My problem with the credit card is that the interest they charge on late submission is astronomical.
It is indeed. India has a Usury Act, which is very clear that interest accrued can’t be above the principle owed. I wonder whether credit cards come under it.

Then comes digital money, PayTM and other such eWallets. Here the charges are phenomenally high.

From 5% to 60%.

No. My neighbourhood grocer tells me that every time he transfers money from his eWallet to his bank account, he is charged 1%.
You see, it works like this. I put money in my eWallet, usually through debit card. The bank charges 1%. That 1% is paid by PayTM. I transfer Rs 100 to my PayTM wallet, but what it gets is Rs 99. Then, whenever I use the eWallet at the merchant’s, PayTM charges the merchant. And that rate goes from 5% to 60%.

Does this 60% depend on the quantum of money spent at the merchant’s?
It depends on the nature of transactions. So if you buy an air ticket, the maximum charge of 60% would be levied. This is the reason why PayTM is advertising that it would give you 50% cash back. Where do you think that 50% is coming from? Well, what is happening is that the moment I indicate I am going to buy my ticket through PayTM, the airline ups the ticket price by 60%. I pay for the ticket, PayTM gives me back 50% and hangs on to the remaining 10%. Really, 10% isn’t a joke.

I wonder how many people know this.
They don’t.

What about the new suggestion that there should be a levy on cash transactions?
I would seriously want to know how they would enforce it. Probably, the only way to do it is to charge you when you are withdrawing cash from your bank. But that can only be a one-time charge, for once the money is out, then that money is going to circulate freely in the market and there is no way you can tax that.

Remember, every currency note in India, during the course of a year, changes hands 16 to 20 times. So if I take out Rs 100 from the bank and I am charged, say, 10%, but the Rs 100 that I took would do at least Rs 1,600-Rs 2,000 worth of transactions.

So it would be unfair to charge me when I withdraw cash from my bank, right?
I think it is a stupid suggestion.

So isn’t it back to the conspiracy theory that demonetisation was aimed at turning India into a cashless or less-cash economy?
Yes, it is back to the conspiracy theory because you are forcing people to move to digital money.

It is like starving a vegetarian and offering him meat to eat for survival. He can’t but consume meat to live.

Isn’t this unethical?
In an important sense, yes. But there is also something more basic than that – which is that you leave a paper trail. This is to say that it will be known how much I am getting or earning and how much I am spending. Both sides of my ledger are, therefore, known. The tax guys can use huge data analytics to pore over people’s income and expenditure.

But the problem is that this information is resident with private companies. I don’t mind giving the same information to tax authorities, because it is a sovereign authority that I have elected to rule this country. I do mind giving data to a bunch of private industrialists who can use it more intensively than the government can.

What do you mean by intensively?
I can, for instance, be targeted, blackmailed. Why should my pattern of expenditure and income become public property?

For instance, a journalist has a story that hits an eWallet owner hard, they can use the data to...
Hold him to ransom. This is a serious concern. It is much more fundamental than 2% or 2.5% here and there. I can live with that. But I am not willing to communicate to every hoodlum in India how much he can rook me for.

Would it be alright with you if all digital money was part of the government structure?
Yes, placed under the Reserve Bank of India, which would be the sole repository of data.

Even if you have to pay a certain charge?
For the convenience of it, yes. But not 60% – I refuse to be douched.

Have the 50 days of demonetisation changed our attitude to cash?
At the moment, we are all running short of cash. So long as there are restrictions on cash, we will never know. It is only when the restrictions are removed that we will get a sense of whether we have changed our behaviour. Right now, we don’t have a choice.

I suppose whatever cash people get their hands on, they will tend to sit on it.
I am sitting on it. There are two aspects to it. Our first charge is to spend on essentials. The second charge is to rebuild my cash reserves in case of emergencies. Most of us are doing it. This is because there is so much uncertainty – for instance, something happens to me and my card, for some reason, doesn’t work and my brother goes to the bank and discovers it has run out of cash, I am dead. All of us are going to rebuild the cash balances that we used to have. Everybody.

In a sense, out of the total cash available in the system, I think a much larger percentage is being held as reserves instead of coming back into circulation. .

Logically then, the situation today is worse than it was on November 8, the day the demonetisation policy was announced, because the gap between cash reserves people had and the amount in circulation was much smaller.

Is this the reason why many commercial establishments, from the cigarette seller to those who conduct a large percentage of transactions through debit or credit cards, complain that sales still haven’t gone back to what they were?
Yes, and I think this trend (of depressed demand) will persist till such time I feel assured that if I go to the bank or the ATM, I will get the amount of money I want. But, today, if I go to the ATM to pull out Rs 20,000, I will only get Rs 2,000. At the bank, I can get anywhere between Rs 24,000 and zero. Because of this uncertainty, my need to hold cash reserves becomes much higher.

Since people are hoarding and not spending, production too gets hit.
Yes, it does.

Photo credit: PTI

Can we, as of now, assess the impact of demonetisation on the informal sector?
No. There is no real-time assessment of the informal sector.

Would you say a lot of people must have been thrown out of jobs?
You see, the poor can’t stay unemployed. They may be thrown out of work, but they will try to do something to survive. So, if you look at the unemployment side of it, the figures won’t go up much. They will always report they are employed (when surveys are done) even if they are sitting at home waiting for work. A lot of people will, therefore, likely report as casual labour instead of employed labour.

There have been reports of weavers from Varanasi who, because of the freeze in economic activity, have gone to their villages and opened up omelet stalls.
The poor can’t afford to do anything.

How would you rate this impact?
High, very high.

When you move from regular payment, even when it is on a daily basis, you have a level of security and certainty that you lose completely when you become casual. Your level of uncertainty and insecurity goes up. That is very expensive.

Expensive, in the sense that it is anxiety-prone?
You are a freelance journalist. So perhaps you can understand it. What happens if no one picks up your piece for three months?

I will have to survive on savings.
You should be able to appreciate that then.

What about the business side?
The business side is taking a massive hit. Every system has a certain amount of in-built resilience. And that resilience comes from the fact that you hold inventory of raw material and finished products at a particular level. In a lot of cases, you pre-pay your labour. So, for a month or two, you can hold on.

How much longer will such businessmen have to hold on for?
We don’t know.

Other countries, too, have undertaken demonetisation. Has anything happened in India that is wholly out of the ordinary?
Yes, the sheer magnitude of demonetisation in India. With the exception of one or two cases, the bulk of demonetisation episodes that have happened around the world fall into two categories – the most common one is against counterfeit currency. This most countries at one point or another have to resort to. This kind of demonetisation is not very disruptive.

That is because it is targeted.
It is targeted and the demonetisation is of a single denomination. Quite often, the single denomination is common currency but you still have the option of using other denominations. It causes just a little bit of discomfort.

The second category of demonetisation is to tackle hyper-inflation. In this case, the currency is anyway not buying what they need. Since it isn’t a credible currency, whether or not you take it out doesn’t matter.

Demonetisation in India saw long queues at banks, deaths and suicides, the hoarding of cash, the impact on business, and so on. Is this the normal progression of demonetisation?
It all depends on how you handle it. The way we have done it – well, our focus was on the consumer.

In other countries?
It is everybody.

But everybody in India is also a consumer.
You have two uses for money – one is for consumption, the other is to make purchases for your business. We began to focus on the production side a little late in the day. Initially, I could withdraw money from my saving accounts but not from my current account. Then they (government) suddenly woke up and allowed people to withdraw Rs 50,000 every week from current accounts.

If you don’t take care of the production side, then it immediately affects income; future incomes get affected. At the moment, you are allowing me to draw on my past savings from my past incomes. But, if nothing gets added to it, I am going to run out of money.

Isn’t a period of 50 days too long for businessmen to operate on their past savings?
Yes, you have to be very careful about the state of the current account. That is because businesses run on the current account. Then there are different types of businesses.

Think of agriculture: the entire expenditure is done in three weeks to a month. At sowing time, for instance, you have to buy seeds, fertiliser, pesticide, and make labour payments within those three weeks. If you don’t get the money, then you are sunk.

There are businesses that you can buy on a daily basis. The halwai, for instance, buys on a daily basis. But most businesses have to buy in minimum bulk quantity. What you can buy on a daily basis and what you must have as minimum bulk determines the impact of demonetisation on you.

Ultimately, the impact would be on wages. People would earn less.
Not just wages, the impact is on livelihoods. If I don’t have raw material, I am going to lay off labour. I will hire labour only to the extent I have the raw material on which they can work. If the flow of my raw material gets disturbed, I will lay labour off. So it is a pure livelihood problem.

The businessman, obviously, gets affected.
Hugely. But his income status is much higher, has a better staying power and, therefore, he might not be that badly hurt individually.

Will we see the poor become increasingly indebted?
Almost certainly, they will be indebted and, in almost all cases, to moneylenders. As such, their interest rates are high. It would have gone even higher because the (normal level of) liquidity is not there. In our area – Delhi, Haryana, western Uttar Pradesh – the normal moneylender’s annual interest rate was between 26% and 30%. I am told it has gone up to 50%. This means the level of indebtedness will go higher and the ability to get out of debt will be jeopardised.

How does all that you are talking about square up with Finance Minister Arun Jaitley’s claim that taxes have jumped?
We need to be careful on this. As far as the income tax part is concerned – that is, corporate tax – a lot of people deposited their cash in the old currency as advance payment. But when the time comes for them to file their self-assessment tax returns, they would be paying far less. I, therefore, don’t take the income tax part (of Jaitley’s comment) seriously.

As far as excise taxes go, it is said to have gone up by more than 40%. This is strange. One part of it is coming from the taxes imposed on petroleum last year. You are seeing its effect now. But this amount wouldn’t be so large.

We also know from statistical data that manufacturing, which is from where you collect excise tax, hasn’t done that well. Therefore the question: Where is the money coming from? A 40%-plus increase should stir up the Central Board of Excise and Customs. They should be wondering as to what the hell is happening.

Jaitley has said that the sowing of rabi (winter) crops has increased.
It has increased in comparison to last year, which was a particularly bad year. I don’t know the numbers, but the correct way would be to compare this year’s sowing to that in a normal monsoon year, not a drought year.

Has anything extraordinary happened in India that hasn’t happened in other countries after demonetisation?
The only thing surprising in India is that there has been no rioting. You had rioting in Venezuela. You had it in Nigeria.

How do you explain that?
It is us. We are sui generis. There are no people quite like us. We respond in very different ways.

Is it because the gap between the rich and the poor is enormous in India?
That is true. But in every society, there is anger against those who are particularly seen as exploiters. In India, they can be divided into two categories – the seths and lalas (wealthy merchants and traders) and the other, politicians and bureaucrats. The view that these two groups are getting hurt is very popular.

Hasn’t this started to change with raids and recovery of new currency notes?
People are happy because they still think politicians-bureaucrats are getting it. But they now realise that seths played an important role.

Not only that, many feel the money was not so much in short supply but that the rich had cornered it. But this apart, many businessmen say the prime minister’s repeated threats that demonetisation is just the first step, and the continuing raids, have dampened what is called business spirit.
Let me put it this way – if most of the old currency comes back, it means your efforts to root out corruption have failed. You, therefore, have to be seen as doing something. Otherwise you are going to become a bit of a laughing stock. I, therefore, suspect you will have something on real estate, gold, or…

It may lead to the government inspecting bank lockers.
Yes, or asking people to prove that the houses they own are not benami. It may even go all the way to demonetising Rs 2,000 notes, which is the other store of value.

S Gurumurthy, co-convenor of Swadeshi Jagran Manch, wrote that Rs 2,000 should be demonetised in another five years.
Not five years. Demonetisation of Rs 2,000 notes may happen in six to eight months, after people have collected money.

People also wonder why there have been no raids on business tycoons and industrialists.
It didn’t happen earlier. Why should it happen now?

Now that the 50 days of demonetisation have ended, if you were asked for suggestions, what would those be?
First of all, in so far as the release of cash is concerned, you have to continue with the cap. The limits on withdrawals will have to continue until the banks have enough cash to handle a run-kind of situation. My sense is that it is going to take two to three months.

Two to three months!
Yes, you will have to continue with the limits on withdrawal. On January 1, Prime Minister Narendra Modi cannot and should not come out and say we are lifting all cash withdrawal limits. Otherwise we will have chaos on our hands. You may actually see banks being burnt down.

Second, it is alright for you to be egalitarian on the consumption side. That is to say, I don’t care whether you are rich or poor, everyone will get a limited amount of cash to spend. I think that is fair.

However, on the production side, you cannot be egalitarian. There, the processes are different. There are, as I have pointed out, seasonalities, bulk procurement requirements.

Are you saying that more cash should be made available to producers?

But people will crib. If they are happy that the rich have been hit, then allowing producers a higher amount will have them accuse the government of favouring the rich.
They will have to risk that. Instead of setting arbitrary limits, you should actually allow the bank to issue currency in a rational manner. The bank knows what the currency requirement of each client is, based on what he or she has withdrawn over the years.

Ajaz Ashraf is a journalist in Delhi. His novel, The Hour Before Dawn, has as its backdrop the demolition of the Babri Masjid