Demonetization alone is not enough

S.K.Khanna

PM's decision to demonetize the existing Rs.500 and Rs.1,000 notes is indeed a bold decision to deal with country's massive black money. It has had three main objectives—stopping the counterfeiting of these notes to support terror activities, discouraging illicit funds kept in cash, encouraging cashless transactions and rationalizing over-use of cash in economic transactions. According to experts, the ratio of cash to GDP in India is far higher than other comparable country and needs to be rationalized for the healthy growth and well being of the economy.

Given the wide spread impact of this move, a large swathe of the working class, and poor with no bank accounts had to bear the brunt of this sudden move. People across the country had to spend hours waiting in queues to exchange their Rs.500 and Rs.1,000 notes, but still they welcomed the move stating that there is no gain without pain.

By and large, amid the gloom, pain and hardships, a strong spirit of adjustment and cooperation was witnessed even as some complaints surfaced about government's lack of preparation to deal with this situation. While currency ban is positive, planning and management of operations was faulty. "The banks should have taken care of cash crunch and malfunctioning of ATMs," said an elderly couple having been in the long queue to swap their old currency.

"For smoother flow of cash to mitigate the hardships of the people, remonetization should have been done on a war footing, keeping in view the informal and agriculture sector," said a retired RBI official.

Concerned at the transitory inconvenience of the public, the PM said, "I salute my countrymen who stood for hours but accepted the decision in the national interest. Despite problems and attempts to provoke them, the common men bore the hardships gracefully. Empathizing with the public, the PM made passionate plea for 50 days cooperation in his attempts. Following PM's appeal to provide relief to the public, important relaxations were announced to assuage the growing impatience due to the fall out of decision to demonetize currency.

While various professional bodies predicted gains from this move, real estate sector felt rattled stating that the move has come at a worse time for the developers, as they apprehend transaction volumes coming to a standstill. In the long run, this move bodes well for the real estate sector brining transparency in the sector. "With other legislations like PERA, the move will help to clean the system and making it more organized," said Deep Kantawala, Head –ICS Real Estate Partners and CFO –ICS group during his interaction with SKK. "It is the fly-by-night players who are cribbing," said President Credai.

On gains flowing to the government, the experts felt that high denomination notes could add-up $45 billion to India's budget, besides having a salutary impact on government borrowings and in turn, help cooling inflation and lowering interest rate regime. Drop in interest rate would facilitate start of many of the stalled infra projects which were unviable to become viable. Therefore, over the next three years, we expect a boom in the Indian economy backed by capital expenditure cycle, said ICICI Prudential Asset Management Company. It is estimated that the government may get around Rs.3-4 trillion gain in the deposits adding to liquidity out of Rs.14 trillion worth of 500 and 1,000 rupees notes in circulation, thus improving the liquidity position. A surge in liquidity will lead to interest rates to fall. Along with the introduction of the goods and services tax, the move constitutes a far reaching reset of Indian economy, he added. The move coming in the wake of Income Disclosure Scheme (IDS) and netting Rs.1,27,490 crore to government coffers, has been appreciated by the Washington Post. In a related development hailing the move, US experts described the demonetization measure as a bold move to check black money and facilitate financing of India's economic reform funding.

AT home, CII hailing government decision, the industry body has called for little patience for demonetization benefits to play out and stated that a stronger economy will emerge as the use of financial technology for payments increase along with lower cash dependence.

For centuries India has been a cash economy. We worship currency. Its sudden disturbance is bound to create transitory inconveniences. Use of ATMs, mobile wallets, and debit cards will take quite some time to populate in urban and rural areas for easy access of cash exchange.

Necessity is the mother of invention. Limited liquidity promoted digital transactions as hundred of small vendors and businesses- Kirana shops, tea and paan kiosks and even doctors- across the country started using e-wallets and related on-line payment services. The trend would auger well for the future. It will be a leap forward from cash-less to cashless economy.

Talking about the possible benefits accruing from this exercise a senior government official disclosed to the author: "The value of rupee will go up as a result of this exercise. RBI will be able to print more notes to fund development projects without having to worry about fiscal inflation. With one stroke, the nuisance of fake currency to the tune of Rs.70,000 crore from Pakistan for over decades, has been struck."

Bonanza for power discoms
The demonetization drive seems to have led a windfall for power discoms across the country. The discoms have witnessed defaulters coming forward to clear arrears and in many cases consumers depositing advance payments over the period. Discoms in UP, Rajasthan, and Delhi alone received Rs.1,100 crore.

But in the ultimate the success of demonetization move depends upon the extent it is implemented and money so accrued utilized for re-capitalization of banks and increasing government expenditure for infra and social sector.

Demonetization is a good initiative but, in itself, it cannot be expected to make a big difference to eradicate black money. For a frontal assault on black money, we need many more steps like IDS, amendment of Benami Transaction Act and above all banning donations and improving tax compliance. The present move only targets low and middle level economic offenders and not the big fish who are prime movers in the process. The interplay of these measures would significantly strengthen the government's systematic efforts to curb black money in the economy in the long run.