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Demonetization & long-term economic outlook

20 Mar 2017 |By: Sunil Patni

The demonetization program that India launched on 8th November 2016, wherein Rs 500 and Rs 1000 denominated currency notes lost their status as legal tender overnight,  is evaluated considering the short term costs and taking into account the long term gains. Welfare for people in the low-income brackets and a decline in the nation’s GDP are among the short term losses.

The Long term gains from the exercise include enlarging the income-tax net through new tax payers, linking investments in physical assets to PAN, cleaning up the real-estate sector, building up consciousness on avoiding black money transactions, growth of digital transaction, and the formal economy growing further.

demonetization

The dust from demonetization is just settling down

Plenty of negative reactions have done the rounds without regard to the long term benefits from demonetization. Such a massive action announced without a hint did put the man on the street to considerable inconvenience for the two month period when one had to literally run from pillar to post for small amounts of cash. But, this segment of the population is now out of all those travails and it is business as usual for them

The following are the key takeaways for the Indian economy

-          With the culture of digital payments setting in, the economy will become more formal bringing down the cash component in transactions. Digitalization will also lead to higher transparency in expenditure making it easier for the tax authorities, particularly in tracking big expenses.

-          Real estate has remained the mother of black money transactions in the country and this is set for a major overhaul. The process could be slow, but sure and the sector will see significantly lesser black money transactions.

-          Social shake up – From a situation where every other Indian was focused on having some ‘unaccounted’ money, there will be quantum shift in attitude since most high value transactions will now be transparent. More and more people would want to stay clear of ‘black money’ for fear of getting caught and the consequences thereof.

-          Parallel economy will experience a substantial reduction in the circumference available for its activities. Demonetization is not focused on black money alone and we can expect more supportive measures in the coming days. Quoting PAN number has already been made compulsory for transactions exceeding Rs.2 lakhs.

-          The tax base or the number of Indians paying income-tax is expected to see a strong surge in the aftermath of demonetization. The tax slabs have been overhauled and tax incidence reduced for people at the lower income brackets.

-          Stamp duty structure in the real sector has long been crying for an overhaul. With demonetization nearly extinguishing the black money component, stamp duties may now see a sea change making home buying more affordable for people.

-          More household savings may flow to banks and capital markets, rather than dead investments like land and gold.

Yet, we cannot overlook the fact that most black money is never in liquid cash and what has now happened is only the tip of the ice-berg. However, the exercise has created a strong road map to act as a strong deterrent for those who run the parallel economy. But, for those who are habituated to dealing with black money, they are bound to invent new methods and the legal system should therefore gear up to this challenge.

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