Economist and Advisor to the Investment Committee of the Singapore-based Lumen Capital Investors, V Anantha Nageswaran, feels that the demonetisation is not necessarily bad, and if handled well, could lead to a positive transformation of the economy.

Calling himself a “cautious optimist” on demonetisation, Nageswaran said, “I see in the exercise a potential for transforming the economy but the potential has to be (made into) reality through policy action. He was speaking at the Annual Day of the Madras Chamber of Commerce and Industry (MCCI) here on Tuesday.

He said that two reasons that are generally said to be the triggers of the demonetisation — a huge rise in high-value currency and black money — ought not to be regarded as the basis of the note-ban exercise. Nageswaran, who has expressed his views also in his blog, ‘The Gold Standard’, observed that there were many countries with high proportion of high-value currencies in their total notes in circulation mix.

He named Thailand (with 93 per cent), China (87 per cent) and Indonesia (90 per cent) as other countries comparable to India (86 per cent) on this count.

Further, it was not correct to say that the proportion of high-value notes rose only during the UPA regime, he said, noting that the share of ₹500 and ₹1,000 notes in the total currencies in circulation rose from 25 per cent to 53 per cent between 2001 and 2004.

Quoting Friedrich Schneider, an economics professors at the Johannes Kepler University in Linz, Austria, who is an authority on black money, Nageswaran said many countries, notably Brazil, Russia and Thailand, had larger black economies than India. “India's black economy is not an outlier,” he said.

However, the true impact of demonetisation would be “in transforming India’s economy to a higher growth path,” he said.

Quoting figures from the Annual Survey of Industries, Nageswaran said there were 6.3 crore unincorporated non-agricultural, non-construction enterprises in India and these produced a gross economic value of ₹11.52 lakh crore. In contrast, there were only 189,000 factories that produced GVA of ₹11.64 lakh crore.

GVA per worker works out to ₹1,36,317 for the 6.3 crore unincorporated enterprises, whereas it is ₹6.14 crore for the 189,000 factories. Correspondingly, average emoluments per worker are ₹87,544 and ₹2.85 lakh, respectively.

“This lopsided structure is not the structure of the economy that wants to become a superpower,” he said.

His blog is clearer on this point. He calls the 6.3 crore small, unincorporated companies “subsistence enterprises” that “tie-up valuable resources like land, power and water, and it is unlikely that they pay for them.”

“This is where demonetisation comes into play,” says Nageswaran. Demonetisation has made life difficult for those who operate on cash, making some of them poorer. The task before the government is now to help them become “bigger and formal enterprises.”

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