Demonetisation has begun prolonged recession: Patnaik

It has little impact on black money, says noted economist

What we are going through is just the beginning of a sordid chapter in the Indian economy, says Prabhat Patnaik

VIJAYAWADA: Noted economist Prabhat Patnaik has asserted that by demonetising old Rs.1,000 and Rs.500 notes which constituted nearly 86 per cent of the currency in circulation, Prime Minister Narendra Modi has actually sowed the seeds of a long-drawn recession. Demonetisation has dealt a severe blow to the informal (unorganised) sector which uses most of the cash.

“Rendering the cash in their possession valueless led to a drastic contraction in demand and since their contribution to the GDP, which stands around 50 per cent, has suffered a major dent, the move (demonetisation) has hit the organised sector too. The consequence is a generalised recession. What we are going through is just the beginning of this sordid chapter in the Indian economy,” Mr. Patnaik observed.

Delivering a talk on demonetisation jointly organised by the Social Sciences Trust, Makineni Basavapunnaiah Vignana Kendram and Progressive Forum here on Wednesday, Mr. Patnaik strongly contested the Central government’s claim that demonetisation would extinguish the black economy.

“Demonetisation has little impact on black money. What happened was the cash in the people’s possession has just moved into the banks’ vaults. The Reserve Bank neither has the money to pay interest on securities that the banks, which are saddled with cash, proposed to buy to earn interest nor a clearance from the Government to allow banks to liquidate the stockpile of cash to generate income from deposits. It (RBI) will now compensate the bank’s eroded interest income by paying out of the budgetary resources,” he said.

“An act of despotism”

Stating that cash transactions are ‘cost-less’, Mr. Patnaik said forcing the people to make cashless payments which imposed significant overheads in the form of service charges amounted to an act of despotism.

“The executive cannot interfere with the people’s preferences of asset holding (whether to pay cash, use credit/debit cards or choose other means) like the way Mr. Modi did. Basically, such a measure could not be taken without the Parliament passing an enabling legislation. But, no one dared to question the very rationale behind demonetisation,” the noted Marxist economist added.