Demonetisation of currency notes of R500 and R1,000 is a show stopper moment in India’s history. This move is one chord that touched every Indian much like the notes themselves which were once part of every wallet. As the elephantine exercise of remonetising the ATMs and banks with the newer currency unfolds, it exposes the severe inconveniences people have to undergo. However, for any status quo to change, short term inconvenience has to be viewed in light of the long term vision. If implemented in the right earnest, this single move has the ability to transform and remodel the economic as well as social mindset about the country.
Demonetisation will clearly have far reaching consequences across sectors. Real estate and jewellery segments are likely to witness a significant disruption. Particularly for the real estate segment, which drives the economy to a great extent, the impact could be seen in the form of correction in prices in the short- to medium-term, both in the primary and secondary markets. Coupled with the implementation of RERA, this could set in motion a cleansing exercise for this sector. If these moves are implemented effectively, the Indian realty sector could be on par with the global players. The PM has indicated intent to address black money parked in real estate and jewellery as well. In all probabilities, the clamp down on black money sought through these measures will trigger a spiralling clean-up exercise over the next few years.
The move is also positive in recapitalising the balance sheets of banks which have been reeling under the pressure of rising non-performing assets (NPA). With more money deposited in banks, one should look at a lower interest rate cycle in the medium-term, pushing down inflation levels and enlarging credit growth. Secondly, the tax revenues mopped up through this process will help improve government finances which should push up spending on infrastructure, medical facilities, defence and education. The increase in private, as well as government spending, is likely to lead to growth in employment opportunities.
As government revenues rise, it may not be wrong to expect the benefits being passed over to the public potentially in the form of reduced taxes in the next 1-2 years. Rising disposable incomes on account of increased employment as well as reduced tax outgo should further push up discretionary consumption expenditure.
Evidently, the kind of acceleration the move can trigger across the economy can be unprecedented and very welcome. While it is difficult to estimate the impact on GDP growth, it may not be wrong to state that an acceleration of a growing economy has the potential to catapult the country’s global positioning and attractiveness. The impact should be seen and felt far and wide, on the stock markets, foreign investment inflows, current account deficit, balance of payments position.
There have been discussions around the impact this has on digital and cashless payments. Undoubtedly, if even some portion of the current form of cash payments can be moved digital with this move, it will be a big step in multiple ways. On the one hand, it helps reduce the costs of the transactions, it also presents itself as a long term solution to addressing the parallel economy issue that the country has been grappling with for a long time. While demonetisation schemes have been brought in India in the past on two occasions, their impact was limited due to inefficient implementation. We should hope that with the kind of rigour this has been announced and followed through this time, realisation of the potential benefits may not be distant.
One can take some cues from the benefits such a move has yielded to some countries, such as Singapore, a country that hardly has any illegal funds or black money. But the credit of cleansing Singapore of the illegal funds not just goes to its former PM Lee Kwan Yew, but also to each and every citizen of Singapore who toed the line and stuck to the rule like an infant would to its mother. Besides cleansing, Singapore government also ensured that the new currency notes have multiple security features making it impossible to be reproduced by illegal printers. While Indian government has denied that the notes are chip based for additional security, it would have been really nice to see such features on our notes.
What is noteworthy is the vision with which the Indian Government has moved about on this. Starting with the Jan-Dhan Yojana in August 2014, which saw opening of over 25 crore bank accounts, the centre announced the Overseas Black Money Law in July 2015, which led to declaration of more than R4,000 crore of undeclared foreign income. This was followed by the Income Disclosure Scheme, popularly called IDS, which closed on September 30 this year and led to declaration of over R65,000 crore of undisclosed income. Next in line was the new Benami law, which has been made effective from November 1 this year, and seeks to bring to book benami properties and other assets and shareholdings. The turn of the events are reflective of a strong political will to tackle the menace of black money and hoarded assets in the years to come.
Gupta is associate partner, Acharyya is principal, Dhruva Advisors. Views are personal