The ultimate impact of Prime Minister Modi’s momentous decision on November 8, 2016, to demonetize 500 and 1000-rupee notes continue to polarise academics and political parties. Since that fateful announcement, not even the government’s staunchest supporters can deny that the roll-out of the scheme was sluggish. As is well documented now, the fallout of the decision included severe cash rationing, queues snaking outside banks and ATMs and a troubling impact on the poor whose daily lives depend on cash transactions. While the strife and inconvenience caused to the citizen cannot be undermined, summing up the performance of demonetization simply on the basis of those early days alone amounts to missing the wood for the trees.
Consider the recent economic evidence following efforts to remonetize the Indian economy. There is reported to be a steady recovery in sectors such as real estate and auto, with critical sectors such as steel showing an uptick in production and demand. Of course, the big development was the release of GDP estimates by the Central Statistics Office on February 28, 2017, which projected GDP for Q3 2017 at nearly 7%, after ostensibly factoring the impact of demonetisation. While this estimate reflects a drop from previous quarters, it also shows a much more bullish picture of the recovery than the doomsday predictions made by political parties and even certain economists.
Spurred by these positive signals, the administration will be buoyed to receive support in recent weeks from international organisations such as the World Bank and Organisation for Economic Cooperation and Development. OECD in particular was optimistic in its outlook by opining that while demonetization would impact consumption in the short-term, the reform will lead to a growth in tax compliance and financial penetration.
As the economy gets closer to remonetisation, there is much to be positive about the potential of demonetization. First, the move has resulted in a significant amount of cash to be returned to the formal economy. According to Moody’s, there would be an increase of approximately 1-2% in bank deposits. Increased liquidity while inviting action at some point to curb inflation, should lead to cheaper lending. Second, the growth in banked and digital transactions will assist the taxman in mapping the flow of cash in the economy, and bring more people within the tax net. This should address an oft-cited weakness of the Indian economy, which is low tax base and recovery. Third, certain sectors such as real estate and Jems and Jewellery that traditionally involve a large flow of black money are expected to see much-needed reform and inflow of foreign investment. Increased banked transactions in the sector should foster greater transparency and confidence in the sector and more institutional investment. Finally, foreign investors looking to deploy capital in India are going to be one of the biggest beneficiaries of demonetisation. The transparency fostered by demonetisation will shatter the ubiquitous requirement of foreign companies “greasing the wheels” to do business in India. Combined with other transformative measures such as the Goods and Services Tax, the benefits of demonetisation will attract more foreign investment into the country, as doing business is made easier.
A steady hand from the Modi administration in the coming months could make this potential a reality. Coupled with this, impending reforms such as GST will only add an impetus to propel the economy forward. The government would do well by continuing its push for greater digital transactions and enhanced transparency in consumer spending. I am confident that doing so will help realise the potential of this innovative measure promises to take the shackles off a cleaner, more robust and accelerating Indian economy.
(The author is former Chairman & Managing Director of Syndicate Bank & Central Information Commissioner)