Rs 500, Rs 100 notes ban: Stating that demonetisation will allow wealth transfer from private individuals to the public sector, chief economic advisor Arvind Subramanian has allayed fears that consumption would be hit. The government could offset any reduction in private spending, he noted.
On Tuesday, prime minister Narendra Modi announced withdrawal of Rs 500 and Rs 1,000 banknotes in the country in a clampdown on black money, corruption and counterfeit currency. According to RBI data, Rs 500 and Rs 1,000 notes constitute about 86% of the total currency notes under circulation as on March 31, 2016. Many analysts have expressed apprehension that the economy might see some negative impact in the short run as a result of the consumption slack due to unavailability of cash.
However, Subramanian said demonitisation should be seen more as a transfer of unaccounted wealth from the private sector to the government and public sector. “It’s not a wealth reduction in the economy, but a wealth transfer,” he said at an economic editors’ conference here. If the private sector spends a little less, the government could always offset that impact, so that overall economic activity remains as usual, he added.
Speaking at the event, finance minister Arun Jaitley acknowledged there could be some impact on local purchases in cash-intensive sectors for a few days due to likely inadequacy in availability of currencies. “In the short run it could (impact consumption), but a large part of these currencies which are being removed are static.” So, he expressed hope that consumption would gradually become normal in the next few weeks after the currency replacement takes place.
Citing reasonably good tax collections, he said higher government spending in the first half of the current fiscal, higher global investment and recent improvement in local demand are signs that Indian economy was doing well despite constraints in the global economy.
However, he lamented that global rating agencies have failed to take note of the series of reforms initiated by the Narendra Modi government since it came to power to improve business climate in India. “For the kind of steps that we have taken, we still have not got from international agencies a full recognition for the effort that we have put in,” Jaitley said.
According to SBI Research, the actual unaccounted cash not coming back to the system could be significantly higher than Rs 2.5 lakh crore. This will impact the RBI balance sheet in a positive manner, as the unaccounted money that is not coming back will reduce currency liability of RBI and hence the asset size should also get reduced proportionally.
“This will open up a fiscal windfall for the government that can be used for need based funding,” it said.