Healing effects of demonetisation!

The biggest news of the season is demonetization. That’s technically a wrong term, because it means removal of high value notes from circulation. What we have had instead is that old notes are taken out, and new notes are being replaced. So far in the first two weeks after that dramatic and stunning announcement by our Prime Minister, some 6 trillion rupee worth of old notes have been turned in. That’s close to 40 percent of the total notes that have been retired. Of the remaining 60 percent, at least one third or even one half may not come back at all. That’s the “black money” stock, which is ill begotten, and difficult to explain.

The government says that if unaccounted money is stuffed into your account, there will be heavy penalty to pay. It will face a high tax of 50 percent. Plus your money may be kept locked up for four years in a fixed deposit that you can’t touch. There are so many stories of the poor man’s Jan Dhan accounts being stuffed with other people’s money. All that will get investigated and validated. It’s a major cleanup campaign, aimed to strike fear in the hearts of tax evaders. Next time someone tries to sell you something without a receipt, say a polite “no thanks” to them.

The overall impact of the great currency swap is yet to be determined. The long queues are slowly shortening. Cash is becoming available at ATM’s and in bank branches. Usage of cashless instruments is zooming. PayTM and others are rejoicing. Due to cash crunch, people in cities are buying food and groceries from super markets rather than kirana stores. So the sale of organized retails, at least in food items has zoomed. But since 45 percent of the economy is in the informal sector, and works on cash, it will suffer. The cash crunch will be a temporary dampener on cash intensive sectors like daily wage workers, trucking, wholesale trade and so on. Weddings and property registrations have been negatively impacted. Some negative impact on consumer spending will persist, so that GDP growth for this year will fall by perhaps 1 percentage point overall.

What are the positives? There is intangible stuff like a reset of cynicism. The move was so bold, audacious and unprecedented, that people think kuchh bhi ho sakta hai. It looks like the PM and his team is willing to shake up the whole system, to ferret out the bad guys. He has promised a bigger dhamaka after New Year. What could that be? Attack on benami property?

The tangible positives are through monetary and fiscal stimuli that are now expected. Since banks have had a surge of deposits, they can afford the lend money at lower rates. The Reserve Bank of India may now be ready to reduce interest rates, which will help home and car loans and businesses in general. This will be a shot in the arm for industrial growth. The other positive is through fiscal windfall. Since the government allowed tax dues and other unpaid bills owed to them, to be paid by old 500 and 1000 rupee notes, there’s been a rush of payment. That’s good collection for local authorities. Additionally the old notes that will not come back to RBI, will eventually lead to some fiscal benefit to the central government. We may also see a tax cut in the forthcoming Union budget.

The Goods and Services Tax rollout is expected in the next six months. That too has a positive impact on fiscal resources. Hence with both fiscal and monetary stimulus, GDP growth might pick up sharply next year, starting April. The road from here to April may be bumpy, but you can bet the government is determined to make it all work. Tighten your seatbelt till then.

Credits Bangalore Mirror

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