A Different Perspective to Growth After Demonetization

Posted in Finance Articles, Total Reads: 2385 , Published on 01 April 2017
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In every ideal democracy, the government of the day will always take steps and measures which are necessary for the welfare of state. Therefore, the decisions of the government are generally for the public good, but the means and the mode used for their implementation determines the nature of policy. It is expected that the demonetization decision is only one of the several of a steps of a larger economic measure which the government is trying to implement. However, when it comes to eradicating black money, the decision needs to be supported by taking additional steps like imposing stringent tax laws and action against benami properties and more emphasis on cashless transactions. Only then it will have the desired impact.

The PM justifying the move of demonetization said that they took the decision not for some short term windfall gain but for long term structural transformation, Digital transaction should not be viewed only short term substitute to help through the period of cash shortage. There is also a need to comprehensively relook and reform political funding.


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Good news is that the RBI has increased the cash withdrawls limits from ATMs and current accounts. Customers can withdraw Rs 10,000 per day from ATMs against Rs 4,500 earlier. Current account holders can take out Rs 1 Lakh a week against Rs 50,000 earlier. A consolation is that the cashless transactions have risen 90% and barter system has started being a way of doing business.


“The radical move to invalidate high denomination notes, in which the black economy primarily transacts, is a daring step. Around 80% of the currency in higher denominations has now been deposited back into bank accounts. Since individual deposits will now be matched with their tax returns and unaccounted money will be taxed, this will yield a windfall for the government, permitting large increase in public expenditure. Demonetization will result in an impressive switch into digital transaction”, the noted economist Mr. Jagdish Bhagwati says.


Post demonetization Rs 25 billion were deposited in cash in dormant bank accounts and Rs 16 billion in the accounts of co- operative banks. More than Rs 2 Lakh were deposited in cash in over 60 lakh bank accounts. More than Rs 10.7 billion cash was deposited in different bank accounts in North eastern states. Rs 3 to 4 lakh Crore of evaded income was deposited in banks and repayment of nearly Rs 80,000 Crore of loans was done post demonetization. The I-T Department and the ED is looking into the source of all such money.


Bad news is that most of the ATMs have no money. Several countrymen had to come out of houses, abandon the work and business and queue up banks and ATMs to claim their own money. One third trucks are at a standstill, the Bollywood film industry is hit by 35%. People are waiting for rate reduction. Farmers, fishing and construction industry are facing difficulties. Daily wage earners and tourism are facing the wrath of this move. Many unlikely places were raided by the I. T. Departments. Even at a conservative estimate, the I. T. Department needs to seek explanation of at least a million people which in itself is a mammoth task and with the present machinery, the task seems impossible.


Critics view this as a “monumental management failure and organized loot.” They allege that this move will adversely impact GDP, agriculture, small businesses, informal sector and it will have a crippling effect on expatriates. Shortage of cash has added woes to emergencies like marriages, hospitalization and NRIs are facing issues as their foreign remittances are not getting realized.

While the mudslinging is going on, IMF has come out with some new projections and cut India’s growth estimates by 2016- 17 to 6.6 % from the earlier 7.6 % due the impact of the government’s move to scrap high value currency. India’s growth forecast for the current and next fiscal year will fall by 1% and 0.4% respectively, which may be because of temporary negative consumption shock induced by cash shortages and payment disruptions. RBI and economists have cut India’s growth estimates from 7.6% to 7.1%. However, this estimate does not take in to account, the impact of demonetization. China may overtake India as the fastest growing economy of the world. It is expected that this move will increase tax- GDP which is at 16.6% as compared to China at 19.4%.


Some say that such a push should have happened over a period of few years rather than through shock treatment. It is just a matter of time before fake notes enter the scene again in a major way. Mr. Raghuram Rajan put his point across by stating “black money hoarders find ways to divide their hoard into many small pieces. There are ways around demonetization. It is not easy to flush out black money”. The GST roll- out has now been postponed to July 1st 2017 due to this major event.

ASSOCHAM reiterating the same point says that demonetization may wipe out the present stock of black money held in cash from the economy but cannot eliminate the ill- gotten wealth converted into assets such as gold and real estate. Further reforms like lowering stamp duty, electronic registration of real Estates are needed. Given the resource constraints with the tax authorities, carrying out an exercise for identification of laundered money may be a herculean task. White money used to purchase something becomes black if the shopkeeper does not pay sales tax. Ironically, several of our laws are badly drafted and framed, leaving scope for official discretion.

SBI Chief Arundhati Bhattacharya is optimistic enough to say that the situation arising out of demonetization will become totally normal by the end of February. Moody’s- the credit rating agency expects the government to renew its commitment to increase capital spending and address the short term impact of demonetization. However, it cautions that there is a very limited room to reduce fiscal deficit to 3% in FY 18.


Other options to curb this issue could have been-

i. Only 1% of India’s population pays taxes and therefore, more officers can be trained to identify the reasons and curbing tax evasions, eliminating loopholes and strider punishment for defaulters can be looked into.

ii. 90% of the transactions are in cash and perhaps extra charges can be levied on all cash transactions.

iii. It would be better to introduce stricter regulations in share markets, benami accounts, overseas accounts, gold and real estate and transport markets to check black money.

In the words of the Noble laureate Dr. Sen- “Good policies sometimes cause pain but whatever causes pain- no matter how intense- is not necessarily a good policy.”


This article has been authored by Bhagyashree Kulkarni from IMI Delhi

 

References:

• Express web desk (2016, Nov 19). What foreign media thinks about PM Narendra Modi’s demonetization move

• Economics Club of IMI (2016, Nov 13). Economic Impact of Demonetizing the Indian Rupee.

• Nathan, Narendra (2016, Nov 14). How Demonetization and Donald Trump’s victory impact your investments.

• Patnaik, Prabhat (2016, Nov 19). “Black Money” and India’s demonetization project.


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