From a mid-term perspective covering 1-2 years, the overall
effects of demonetisation could be deleterious and dent the GDP of the economy
by 1 per cent-2 per cent. However, if one looks through the pink glass, not all is bad with
demonetisation, and as was said in the earlier post, the benefits are enormous.
Chiefly, these include:
- By making Rs 500 and Rs 1,000 non-legal tender, Hon'ble Modiji has created a strong perception that he is indeed keen to fight black money starting from home. It will now be difficult for people to stash money in big denomination currency since it has vanished from the market.
- He has forced out big denomination notes from the homes of hoarders and has got them to deposit them in the banks thus ensuring that the state earns a suitable tax on it.
- It will end in the mid-term the vicious cycle of black money being used to do illegal activities like gambling, drug trafficking, terrorism funding, money laundering, prostitution which by multiplying in turn generates more black money.
- The new high-technology notes will help in curtailing the use of counterfeit currency. Most of these hi-tech notes cannot be replicated easily.
- The lack of availability of high denomination notes chokes funding of arms smuggling, narcotics trade and espionage by inimical countries.
- By limiting ATM withdrawal transactions and lifting the limits gradually will encourage cashless transactions thus spurring digital currency. This way most transactions once linked to Aadhaar card number can be monitored and this will reveal a goldmine of spending/purchase data of the Indian public which could help the government judiciously allocate funds for welfare activities.
- Tracking and tracing the money trail has been made easier as the cashless transactions can be made only by producing valid identity cards like aadhar, PAN and election cards.
- Benami transactions especially in real estate will be spiked as as legislation provides stiff penalties.
- Real estate transactions will become more transparent. This is likely to attract more domestic and foreign investors.
- Demonetisation has rationalised the housing price and rent thus spurring demand in this sector.
- Banks would stand to marginally benefit as the liquidity in the market increases thus lowering the interest rates thus spurring demand which will in turn kickstart the economy.
So analysts are of the view that even though the move is
disruptive, there is a brilliant spark in Hon'ble Modiji’s signature style. Now
the question is, if there has been some collateral damage due to
demonetisation, how do we contain it and what steps should be taken to ensure
that BJP continues to be the favourite in the 2019 General Elections and the
state elections preceding this?
The following steps need to be taken in right earnest:
- 1 The taxes earned from the declaration and deposit of high denomination notes in the banks must be swiftly channelized in providing the basic necessities to the majority impoverished people in terms of healthy nutrition, by overhauling healthcare and making it delivery-oriented and effective and by providing good education in the government and government-funded schools up to the higher secondary stage. The other is providing affordable shelter and clothing.
- 2 The government must ensure that the Rs 13 lakh crore now deposited with the banks are NOT used to write off the loans of big corporates which constitute Rs 8 lakh crore in banks' NPAs.
- 3 The government should quickly step in to restore the autonomy and the reputation and credibility of the RBI in the domestic/international arena. The structure of a coordinated and consultative approach should be quickly reintroduced between the government and the RBI.
- 4 The government must unleash a propaganda blitzkrieg on the benefits of demonetisation in the print, electronic and social media on a war-footing starting today.
- 5 Modiji should usher in a less-hawkish direct tax administration and a technological-driven anti-evasion approach for indirect taxes. Further, the government should abandon retrospective amendmenmts in tax laws. With a two-thirds majority in the Lok Sabha, the government can push towards source-based taxation rather than the residence-based taxation.
- 6 The government needs to follow strict fiscal discipline in order to reign in fiscal deficit especially during the budget preparation.
- 7 The government should move in to curb inflation. Currently stagflation (a situation where you have high inflation and slow growth) is considered dangerous for the economy.
- 8 Hon'ble Modiji should quickly rebuild and sustain confidence of foreign/domestic investors because their money is necessary to fund infrastructure projects.
- 9 The government should generate employment by helping MSMEs with loans and management systems to scale up operations.
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