ET Now: What is your take on the RBI’s demonetisation data that came out yesterday?
P Chidambaram: Scripted writings that a huge amount of money will not come back to the system and therefore government stands to gain.
ET Now: I am tempted to ask you and I know I am giving you a free ball to kind of hit a six forward the government of the day cannot be foolish why do you believe they did it then?
P Chidambaram: No, I know governments in the past which have been foolish too.
ET Now: Do you believe they will just ill advice?
P Chidambaram: Absolute.
ET Now: I am presuming the intention cannot be wrong.
P Chidambaram: Absolutely ill advised.
ET Now: But will you at least grant them the fact and one of the arguments that they are making depending their decision is that the stock of black money has at least been attacked at least the government has been pointed in the direction of people who did not declare their wealth, they have been forced to declare their money and the government is going to go after them eventually, would not you agree with that argument?
P Chidambaram: No, on the contrary what they have given to the black money hoarders was an opportunity to convert to white money. If there was a stock of black money with someone and there was an odd Rs 500 note or Rs 1000 note with a poor woman in some village in Bihar that poor lady could not convert her Rs 500 or Rs 1000 for many reasons. For the guy who had lots of black money boldly went to the bank and converted it now are you saying he is a fool, would he have taken such a large amount of black money and deposited in his account and convert it without having, what he may have thought a pretty good idea of how he can defend himself so I think the hoarders of black money got a very convenient mechanism to convert their black money into white money.
ET Now: There are two counter arguments I am going to make to that the first counter argument is that I am sure he may have thought in his mind that he will have a reason but it is going to point the taxman in his direction and will eventually expand the tax base that is the government’s argument. The other argument that I am going to make is that in the past have you yourself have had a voluntary disclosure income scheme which allows people to convert their black money into white that is the compromise that political economies had made, do not they?
P Chidambaram: Voluntary disclosure did not assume that the money was black. It simply said that it is taxable income, if you have not offered it to tax, offer it to tax pay the current tax rate of 30% and you would be absolved and then nothing to do with black money or white money people. Well it was not taxed, they did not offer it for tax purposes and we ask them to pay tax of 30% this was the free conversion anybody who had a good story or a good defence prepared by his chartered accountant or lawyer went to the bank deposit the money in various names and converted it. It was, in fact, cost free conversion.
ET Now: But would not you at least grant the government the fact that the whole exercise is at least pointed the government in the direction of people who are allegedly hoarders or were allegedly holders of black money?
P Chidambaram: That is simply a hypothesis. Ultimately, government has to prove its case and the statement they made that they have detected Rs 17526 crore of alleged undisclosed income now that is a pittance if you take it as a proportionate of the total income tax collection. But let us assume Rs 17526 crore of undisclosed income even applying the maximum tax rate that will fetch them about Rs 5100 crore but final there will be an assessment, there will be an appeal, there will be further appeal to the tribunal, there will be further court proceedings only when the final court proceedings are over we will know how much of this income was actually undisclosed income and how much tax they collected. I would not be surprised if out of the Rs 17526 crore that they claim and the calculated tax should be Rs 5100 crore they end up collecting about a Rs 1000 crore.
ET Now: While I know you want to dispute everything that the government has said and you have been a sharp critic of demonetisation but would not you agree with me that it led to a mindset change at least people are wary, people are at least scare to hoard black money?
P Chidambaram: Has it? Now please tell me what was the money that was found to be distributed in the RK Nagar constituency by-election caused by Ms Jayalalitha’s death and election was counter mandate. Income tax found the paper which showed how much money had been given to how many persons for distribution. Was that money, black money or white money.? Did they have any fear about hoarding black money or distribution black money or using black money. And all these rallies that are being held are they being financed purely by cheque is every expenditure in connection with the rally supported by cheque payment I mean do not deceive yourself. There is any amount of black money sloshing in the market today and a lot of activities are still being financed not by cheque but by cash.
ET Now: So no part of your believes that people who did hoard black money and have of course now conveniently converted it to white are scared, the whole c halta hai attitude of not paying tax you do not think that has changed at all?
P Chidambaram: It may have changed for ordinary people who have not disclosed small amounts of income.
ET Now: But is not that important as well because I am ordinary and I pay a lot of tax.
P Chidambaram: This is important and nobody says that it is important but the guys who generates black money say I had in one of my columns listed the sectors which generate black money, the sectors which generate black money there is no evidence that they have stopped generating black money. It slowed down for a month or two may be until February or so but I think since there is a need to generate the black money to finance number of activities I think the generation of black money continues.
ET Now: So while the stock has been attracted the process has not been but.
P Chidambaram: The stock was attacked and ended in a defeat for the government.
ET Now: I think in a direct attack to what you said yesterday the finance minister very categorically said that people who have not taken a conscious call on attacking black money while they were in power have no authority to speak right now. It was obviously a direct attack on you because the government of the day insist that the Congress party and who had you as Finance Minister did not take a concrete step or we can discuss and debate whether this was a success or a failure depends on which side of the treasury you sit on but they believe that they at least made an honest effort to crack down the black money, you did not but the allegation?
P Chidambaram: Let them publish. Year wise from say 2004 or even going back to the Vajpayee years, 1999, let them publish year wise number of income tax searches amounts seized in those searches, amount detected as undisclosed income and number of adjudications started. Let them show the year wise numbers on these four or five heads you will find that there is a secular increase in the number of cases, there is no dramatic increase as a result of demonetisation under every government the IT departments have conducted a certain number of searches and that every government IT department has ceased cash, has detected alleged undisclosed income, has started adjudication proceedings this is nothing new besides the time list was received in the UPA tenure. The list from France, Switzerland was received in the UPA tenure and please ask the gentlemen now is the Chief Vigilance Commissioner, he was the member investigation these lists were examined in the UPA government, notices were issues under the UPA government and prosecutions were started under the UPA government. The gentleman is there still in the service of the government. Now contrast that with the panama papers now, why has prosecution not started in those cases for I think all this is good for scoring debating points. Every government has taken action to detect undisclosed income.
ET Now: So you are disputing the fact, I am just going to move back to economy and the fiscal impact of this. You are debating and disputing the fact that this is going to expand the direct tax base at all.
P Chidambaram: I am not disputing it. The direct tax base expanded under the UPA at a phenomenal rate. Look at the increase in the income tax and corporate tax collections in 2005-06, 2006-07 and 2007-08. So what is new about it? Rise in the tax collection by 14% to 20% has happened in the past also.
ET Now: One of the objectives and I kind of agree with you that the goalpost kept changing every time the narrative change. One of the objectives that was stated was that this is going to lead to a less cash, more transparent digital economy. I know the parliament panel has a view on this and I kind of did glance through the draft report that has been prepared and states, but as the former finance minister would not you agree it is good to be a less cash economy, it is good to be a digital economy, it is more transparent. I know cash is the lubricant you have said that oils the economic machinery but is not it good to be digital?
P Chidambaram: Nothing is wrong in persuading people to use less cash and move to more non-cash transactions, I support it. But the fact is in many advanced economies cash used is still 50% to 80%. I have no problem at all with pushing people into using more non-cash transactions. But look at the numbers, in November 2016 non-cash that is electronic payments was 94 lakh crore rupees. I have numbers up to May of 2017, it is 94 lakh crore rupees. There was a spurt in December and February and March, then it has come back to normal 94 lakh crore rupees. As more cash became available, they went back to cash. I am not saying that you should discourage the use of cash and I will tell you a way out. The best way to discourage use of cash is to limit currency notes, the highest denomination should be 500 rupees and no more. In US the highest denomination available to the people is 100 dollars. In the UK, it is 50 pounds. Keep the highest denomination to 500 rupees, more and more people for the larger transactions will begin to use non-cash and the smaller transactions will be done with cash.
ET Now: There is quite a dichotomy there because if you actually see the data, 2000 rupee currency is what 50.2%.
P Chidambaram: Which only shows that the government did not have clear objectives. It did not look into the problem in all its dimensions and set for itself clear objective.
ET Now: So while we are saying that cash is back to being king again, how do you explain the volume of cash that has gone down by almost 17%.
P Chidambaram: That is because you have printed less currency and supplied less currency. That does not mean there is no demand for currency. Please understand, even today 20-25% of the ATMs do not function. They have either been closed down or they are non-functional or ATMs that are functioning dispensed cash only for about two hours a day.
ET Now: I quickly want to touch upon the point of how this has brought the informal economy into the fold of the formal economy, one of the stated objectives was we want to merge the formal and the informal economy. You do not think they have been successful in doing that?
P Chidambaram: Not through demonetisation. Demonetisation is not the answer to merge the informal and the formal. In previous interviews I have explained that in a country where there is legitimate non-taxable income, agriculture income, charities, north-east tribals, legitimate non-taxable income coexisting with taxable income, the flow between one sector to another is constant. It takes place in a thousand rupee note. It may even take place 20 times a day. It will move from one hand to another depends on whose hand the thousand rupee note is, it is either black or white.
ET Now: But if I was just going to talk to you about the fiscal implication of this move and obviously the government had budgeted for a larger dividend, got a lot less from the RBI….
P Chidambaram: Rs 30,000 crores less…
ET Now: I know and I know you…
P Chidambaram: I think you should put that number out, your viewers should now.
ET Now: Rs 30,059 crores rupees which is almost half of what you got last year…
P Chidambaram: No, no half of last year but in terms of projected increase, the loss is about 50,000 crores.
ET Now: So it is lot less than what the government had also budgeted for. But I think a more granular analysis of that number will also tell you it is not an account of demonetisation alone. There were liquidity operations that the RBI had to do which of course was partly to due to demonetisation but partly also due to the forex losses…
P Chidambaram: No wait a minute. Larger deposits, larger interest payments that hit into their profit that is directly related to demonetisation and then the expenditure, they were only counting the actual printing, it is not the actual printing. It is printing, distribution, recalibrating ATMs and collecting the old notes, counting them and destroying them, all of that has a cost. And I think one of the think tanks calculated the cost of demonetisation and said it would be the cost of demonetisation and gave a number, it said that 1,28,000 crores of which the government and RBI alone has to bear a cost of 16,800 crores. So I think the government is understating the cost of this completely misguided adventure.
ET Now: But you do not think a part of this also has to do with, I mean, the dividend is also less on account of the fact that there was excessive appreciation of the rupee on account of forex losses so it has also to do with that, it cannot just entirely be blamed on demonetisation?
P Chidambaram: Maybe, but the rupee has appreciated in past years also. Rupee has depreciated in the past years also. So those are common factors, the uncommon factor is demonetisation and the surge of bank deposits.
ET Now: What about the counterfeit currency?
P Chidambaram: What have they found?
ET Now: They have not found anything but the counter argument to that is if I knowingly had counterfeit currency would I go and deposit it in the banks and perhaps it never made its way back in the banks?
P Chidambaram: Apparently in that rush counterfeit, the currency has also been converted because earlier remember the NIA and one of the Calcutta think tanks calculated the fake currency as about Rs 400 crores.
ET Now: And about 70 crores added annually.
P Chidambaram: And now what have they found? They found the counterfeit currency is about 0.000000 or so I mean the way to deal with counterfeit currency is the way that all governments have traditionally dealt with it periodically once in two or three years. You redesign your currency notes, add new security features and say currency notes printed before a particular date will no longer be legal tender that will effectively neutralise a large part of the counterfeit currency, that is the way it is done the world over.
ET Now: Now that this is done and dusted and now that the figure is out and there is a longer a suspense who would you blame for this misadventure the government of the day or the RBI?
P Chidambaram: No, no, I think you should blame the opposition for bringing out the misadventure. What kind of a question is that? I am not even worried about the misadventure. I am appalled by the gall with which they are continuing to defend it as a great economic act. Why are they doing it? Why do not they simply say yes we had certain objectives unfortunately not all of them have been realised to the extent that we expected it to but they are sub objectives, there are other benefits that have come as a result of demonetisation and therefore we will be more careful in the future? Why do not they have the grace to say that?
ET Now: Which government in the past has said so?
P Chidambaram: I think of several governments which had admitted.
ET Now: While I agree with you that, while I will cut you flack that you will obviously attack the government of the day, you are a member of the opposition and a very active member, what about the RBI’s role in this entire thing, they are the monetary management regime?
P Chidambaram: Shameful. Please read the letter which the government wrote to the RBI on November 7, three objectives; promptly RBI without calling a board meeting with proper notice, well researched background paper and agenda, promptly on the 8th of November at about 5:00-5:30 pm in the evening recommends demonetisation and demonetisation is announced at about 8 o’clock in the evening. Now why did the RBI do the bidding of the government in less than 24 hours?
ET Now: I mean with whatever little information that I have, I can tell you that Urjit Patel’s predecessor Raghuram Rajan put his foot down on this, he was asked apparently in February of last year and he said there is no way we can do demonetisation but if we have to we need to put certain conditions in place that there is a smooth transition.
P Chidambaram: I know that. In fact I had hinted that in one of the interviews.
ET Now: So should not you be criticising the RBI instead of the government?
P Chidambaram: I have yesterday.
ET Now: The government was trying to put its political agenda forward.
P Chidambaram: Yesterday’s tweet I said it is shameful on the part of RBI to have quote, unquote, “recommended the demonetisation”. I think an independent monetary authority should have stood its ground and said you have made a request, let us examine the implications, let us do some research, let us put together a background paper, we will discuss with the government and then take it to the board. RBI should have clearly asked for at least a month to study the proposal of the government assuming the proposal was first mooted on November 7, 2016.
ET Now: If I may ask you a quick question on politics while you and I and economists…
P Chidambaram: No, no, as related to demonetisation.
ET Now: Of course related to demonetisation while you and I and the economists can turn around and we will perhaps discuss this threadbare and debate and denounce this but the common man who has actually suffered, who had actually queued up for hours on end for his own money seems to have rewarded the BJP the BJP has won election after election despite demonetisation, how are you going to explain that?
P Chidambaram: How do you come to these facile conclusions?
ET Now: It has been one of the factors?
P Chidambaram: Two elections were held, actually five elections were held on the same day, the BJP scored a resounding victory in UP, therefore you can conclude that the people of UP have accepted demonetisation, which is a wrong conclusion because elections are not single issues. But in the same day the people of Punjab resoundingly defeated the BJP, the people of Goa, the people of Manipur pushed the BJP to second place and the Congress to first place. So how can you draw a facile conclusion that demonetisation has been accepted by the people, in fact, the correct conclusion is no conclusions can be drawn on demonetisation based on election results.
ET Now: So when will the jury on demonetisation be out?
P Chidambaram: There is no jury on demonetisation, it is a misadventure, it has backfired, it has cost the government a lot of money, it has cost the RBI a lot of face. RBI’s credibility is pretty low now and therefore do not indulge in these misadventures without deliberation and without consultations.
ET Now: Why are you tempted to say the RBI’s credibility is low?
P Chidambaram: Well this is what I think anybody, any writer, any economist abroad tells us, you see the columns that are written by economists based in London or based in Washington you will get that sense.