The recent move by the Government to demonetise high denomination notes is likely to have far-reaching impact, striking a blow at the heart of the illegal economy. While it is not possible to have a firm estimate of unaccounted wealth, it is widely estimated at around a fifth of India’s GDP or around $450 billion.
While some of this may be stored in cash, some may be in assets such as real estate and jewellery. This negatively affects the business environment, especially for those who comply with the law of the land and follow ethical practices, CII has said in a Press release issued here on Sunday.
“After a short period of some pain when the economy adjusts to the sudden withdrawal of cash, CII expects a much stronger economy. India’s cash-dependence is extremely high with a currency-GDP ratio of around 12 per cent compared to 4-5 per cent in other developing countries. High level of cash usage tends to slow down the flow of money through the economy. As we transition to a greater usage of fintech for payments, spending will rise leading to additional economic growth. This is an economic masterstroke by the Prime Minister and must be allowed time to play out” said Chandrajit Banerjee, Director General, CII.
The prevalence of cash use has also made India prone to high inflation. Corruption and excessive cash use tends to erode the purchasing power of money. lower cash use will have a dampening impact on inflation and this will be a further positive for India’s macro-fundamentals.
“The Reserve Bank will now have more room to cut interest rates as inflation subsides. Already, the bond market has reacted to the news with a reduction in the bond yields,” Banerjee observed.
For industry, this is indeed a historic and welcome move with very positive implications. The existence of a parallel economy provides unfair competition to organised industry which pays taxes and complies with standards.
Such a decisive move will change the perception of India completely and bring about much-needed transparency. It will prevent people from violating the law with impunity even for daily business transactions, CII said.