Tamil Nadu

‘Demonetisation will end UPA’s asset inflation-driven growth’

Nepal has termed India’s Rs. 2000 and the new Rs. 500 currency notes “unauthorised and illegal”. Photo: K. Murali Kumar

Nepal has termed India’s Rs. 2000 and the new Rs. 500 currency notes “unauthorised and illegal”. Photo: K. Murali Kumar   | Photo Credit: K. Murali Kumar

Blaming the two UPA governments for using asset inflation as the driver of growth, economic and political commentator S. Gurumurthy on Tuesday said that demonetisation was a planned contraction that would make real growth possible.

Mr. Gurumurthy, who is also the Distinguished Research Professor of Legal Anthropology at SASTRA University, was delivering the 13th Nani Palkhivala Memorial Lecture, organised by the School of Law at the University.

“Without breaking the hold of asset inflation and wealth-influenced jobless growth, there is no real growth possible,” he said. His analysis was founded on the premise that under the then Finance Minister P. Chidambaram, the gains made during the NDA regime of 1999-2004 was lost. “It is a very important point that, the background for this analysis has to start from the movement of the Indian economy from 1999 – how it took an elitist turn based on the experiences of countries like America. Because of that, we destabilised our own economy,” he said.

Mr. Gurumurthy called 1999-2004 the ‘Golden Era of the Indian Economy’. He said that 60 million jobs had been created during those five years, as opposed to 27 lakh jobs in the next six years.

“It happened because of the huge surge of unmonitored cash in the economy which propelled gold prices, which rose 316 times,” he said.

The price of property also rose and the stock market went up four times. “Participatory notes pushed up the stock market, cash pushed up gold and cash pushed up property. This is known as asset inflation, which leads to wealth effect. This wealth effect is what is reflected in the high growth of GDP,” he said, adding that banknotes of the Rs. 1,000 and Rs. 500 denominations constituted 34 per cent of the cash supply in 2004, but rose to 87 per cent later. An RBI study had shown that two-thirds of all Rs. 1,000 and one-thirds of all Rs. 500 banknotes were not in circulation: “Money, instead of a flow, had become store value.”

Piketty effect

Mr. Gurumurthy cited the work of French economist Thomas Piketty to say that the economic growth during 2004-2014 did not improve the lives of the poor.

“This has nothing to do with economic activities which will benefit people less than the higher 10 or 15 per cent of the population. This is known as the Piketty effect...this has nothing to do with the ordinary people. What was happening legally in Europe was happening illegally through the huge cash surge in the Indian economy,” he said.

Among the benefits will be a fall in the price of land, which will enable a growth in the housing sector. “Never in the history of economics, a contraction like this has been deliberately planned...They (economists) say that crisis is inevitable; you ask any economist, he will say, ‘Crisis is correction’. You can’t correct ahead of the correction?...Narendra Modi preponed the crisis to handle it,” he contended.

He had harsh words for economists who have raised concerns about the policy. “If [former United States Secretary of Treasury] Larry Summers writes about India, he is completely illiterate...He doesn’t know how mandis operate. He doesn’t know how Koyambedu [wholesale market] operates. We operate on an entirely different grammar,” said Mr. Gurumurthy.

He, however, warned that the government should move to help small- and medium-scale enterprises. “The most important challenge which the Modi government will face is how to finance the small and medium enterprises, a large number of which were being financed by cash,” he said.

S. Mahalingam, former chief financial officer at Tata Consultancy Services and non-executive chairman of City Union Bank, moderated the discussion.

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Printable version | Sep 29, 2020 5:00:58 PM | https://www.thehindu.com/news/national/tamil-nadu/%E2%80%98Demonetisation-will-end-UPA%E2%80%99s-asset-inflation-driven-growth%E2%80%99/article16728904.ece

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