Greater formalisation of the economy, a transparent and strong banking system, reduced inflation rate are few benefits of this financial masterstroke.
Its imperative to keep economics and politics separate. One needs to wait and watch for the positives of demonetisation drive initiated by the present government on the Indian economy.
Prime Minister Narendra Modi in a special televised message on November 8, 2016 at about 8 pm announced the demonetisation drive. Apparently, the withdrawal of the legal tender character of the then existing bank notes in Rs 500 and Rs 1,000 cast a huge responsibility on the banking system to swiftly withdraw these specified bank notes in as smooth a manner as possible and in a non-disruptive way. Also part of the duty is to provide in exchange notes of other denominations which are legal tender.
Unique Stress Test For Everyone
The instant demand of new currency across the country has put both the Indian Banking System and people of India undergo a different kind of stress test. Serpentine queues have emerged across the the country to deposit, withdraw, or exchange their old Rs 500 and Rs 1000 bank notes against the new series of notes.
But, modern India is witnessing many different revolutions in queues. People are seen excited, thrilled and happy to wait endlessly to grab their favourite newly launched mobile phones. Many a times these queues are of anxious fans to catch a glimpse of film stars, rock bands, artists and other celebrities. Of late, India has also started to see people waiting to get into their favourite restaurants, discotheques and shopping centres to participate in certain promotional schemes.
It definitely will pay off to stand in a queue, howsoever long it is, if it promises to lead the nation in a more globally competitive position and carries along a sovereign backing.
Boost To Economy
While it is not possible to have a firm estimate of unaccounted wealth, industry estimates that around a fifth of India’s GDP or around 450 billion dollar, which is believed to be stored across various channels including tangible assets and cash. The currency in the form of Rs 1000 and Rs 500 notes amounted to Rs 14.2 lakh crore as of March 2016, or about 85 per cent of total currency in circulation. In words of CII Director General Chandrajit Banerjee, the biggest gain from this move will be greater formalisation of the economy. Currently, the costs of informality are evident in low tax base which impacts government revenues, lack of economic control through monetary instruments, and lower economies of scale. India’s tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent, which is much lower than about 21 per cent in other emerging economies. Less than 30 million Indians filed personal income tax with more than half of these paying no tax.
It’s no rocket science that once the economic activities that were not accounted for get into the organised sector, the size of the economy will grow. Hence, the Indian economy from present 2 trillion dollar worth could become a 10 trillion dollar economy at a much faster pace than anticipated earlier backed by rise in global ranking on ease of doing business. It will prevent people from violating the law with impunity even for daily business transactions, CII said.
Eases Inflationary Pressures, EMIs
The demonetisation drive will work wonders for banks whose deposit mobilisation will be strengthened. Once the old currency notes are deposited with banks and more households find it imperative to open bank accounts and make use of card payments, the banking system will witness increase in banks’ liquidity. A direct fall out of enhanced liquidity in banks is the lowering of deposit and lending rates that helps ease the burden of EMIs and augurs well from an macroeconomic front for the real estate, automobile sectors and the industry at large that have more funds available for businesses.
Also, the crackdown on black money by demonetisation will bring down the inflation believes the Vice Chairman of NITI Aayog, Arvind Panagariya. “The move will ensure that transactions will now go much more through the banking system which will ensure transparency. He expressed confidence that the Government’s decision will go a long way in flushing out the black money and bring down the inflation,”
Another major benefit of this demonetisation drive is like a direct attack on terrorism according to the Chairman, SIT on Black Money & Former Judge of the Supreme Court of India, Justice MB Shah and Former Judge of the Supreme Court of India & Vice- Chairman, SIT on Black Money, Justice Arijit Pasayat. “The prevalence of cash use has also made India prone to high inflation. Corruption and excessive cash use tends to erode the purchasing power of money. Lower cash use will have a dampening impact on inflation and this will be a further positive for India’s macrofundamentals,” they stated in a jointly written letter to the Union Finance Minister. India’s tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent.
Written by: Vivek Sethi