Breaking the back of the black

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Sanju Verma
It is true that there have been long queues and minor disruptions too, but neither the bonafide intent nor the execution of the demonetisation drive can be questioned. It is precisely the ‘surprise element’ that will yield phenomenal results
Eons back, former Prime Minister Indira Gandhi gave the clarion call of ‘Garibi hatao’ but it remained a pipe dream. Rajiv Gandhi, who succeeded her, too did precious little. He tried hard to straddle between VP Singh and Sam Pitroda, but eventually left behind a forgettable legacy. The less said about the UPA Government the better. Former Prime Minister Manmohan Singh was not called an “underachiever” by TIME magazine for nothing.
However, the most enduringly corrupt legacy of Nehruvian socialism and successive Congress Governments, that ruled India for more than 60 years, is the yawning chasm between the rich and the poor, made worse by a parallel ‘black economy’ that at an estimated 20 per cent of gross domestic product (GDP), comes to over Rs30 lakh crore or $460 billion, assuming India’s current GDP at $2.3 trillion.
The great news though is the massive assault, launched on the shadow economy, by Prime Minister Narendra Modi on November 8, via demonetisation of old Rs500 and Rs1,000 notes which is one of its kind for its sheer size, scale and timing.
It would have been funny had it not been ironical that, Trinamool Congress chief Mamata Banerjee allowed the Rs2,600 crore Saradha scam and the Rs40,000 crore chit fund scam to loot more than 20 lakh investors through more than 250 shadow companies and 2,500 fictitious bank accounts, should talk of the hardships faced by the downtrodden!
As for the Bahujan Samaj Party leader Mayawati’s fetish for installing more than 130 ‘elephant statues’ in pink sandstone, all over Uttar Pradesh, at the expense of taxpayers money, rankles to this date. Coming to the Samajwadi Party, the only thing that competes with the infamy of Uttar Pradesh being the new rape capital of India, under the inept leadership of Akhilesh Yadav, is the infighting between the ‘chacha-bhatija’ duo. While it is true that there have been lengthy queues and minor disruptions too, neither the bonafide intent nor the execution of the Modi Government can be questioned. It is the ‘surprise element’ that is precisely the reason why this demonetisation exercise is set to yield phenomenal results.
In the final count, one-third of the Rs14.5 lakh crore (money held by way of Rs500 and Rs1,000 notes) will never find its way back into the banking system as it is unaccounted for/illegal. Liability of the Reserve Bank of India (RBI) will, therefore, to that extent, reduce. If assets reduce by as much liabilities, it will only end up as a balance sheet adjustment on the books of RBI but if assets do not reduce likewise, the RBI will be left with a massive surplus that will accrue to its reserves.
More importantly, this exercise should eventually add between $30 billion to $45 billion or between two per cent to three per cent to India’s budget alone which is three times the size of Iceland’s economy!
The Government of India then has the leeway to spend this additional money unearthed by way of demonetisation (between three lakh rupees to Rs4.5 lakh crore) on social services like health care, education, affordable housing et al.
Hence, fear mongering that demonetisation is deflationary is a lot of humbug. True, cash dependent supply chains will face transient glitches, but demonetisation is the cleanest and one of the most efficient and prudent way of pump priming the economy, without the associated evil of adding to undue inflationary pressures.
Government’s finances will get a further thrust from the fact that fiscal deficit of Rs5.3 lakh crore for 2016-2017 is expected to reduce by a whopping 50 per cent. Some estimates suggest that fiscal deficit could actually be fully wiped away!
Assuming a possible situation where tax/GDP remains constant, India, with little luck from future telecom airwaves auctions and PSU disinvestments, can actually cough up a fiscal surplus, a year hence, which will be a first in the longest time in its economic history.
Lending rates should fall too! Don’t forget that India’s 10-year sovereign bond yield that was trading at 7.38 per cent as recently as July this year, was trading at just 6.64 per cent, within two days of the ‘demonetisation’ announcement!
Ten-year bond yields are seen sliding to between 6.15 per cent to 6.4 per cent by March 2017. If that indeed happens, it would mean a secular downtrend in both, short-term and long-term lending rates, including home loans.
A 25bps fall in interest rate on one crore rupee home loan for 20 years, for instance, could lead to savings of four lakh rupees and a 50bps fall could actually lead to a savings of eight lakh rupees, over the tenure of the loan! That, coupled with a 25 per cent to 30 per cent fall in property prices thanks to “freezing of the black component”, is nothing short of an “honesty bonus” for the commoner who under 60 years of Congress rule, had his back broken.
For naysayers who say India is a cash economy with only 2.5 crore credit cards, 57 crore debit cards and 1.3 crore e-wallets, well, the ball has been set rolling for the move from paper to plastic! Also, on extrapolating data from various Government of India websites, including the RBI site, it is now clear that under the Modi Government, more bank accounts were added in the last two years, than the total number added under an inept Congress between 2004-2013! Thanks to ‘Jan Dhan Yojana’, atleast eight out of 10 people have access to banking and that ratio is growing exponentially. Number of households in India, with no access to banking, has shrunk to as little as few than 23,000.
Assuming informal sector at 20 per cent of GDP and assuming formal sector is taxed at an average rate of 15 per cent to 20 per cent, with demonetisation, once the formal and the informal merge, the boost to GDP on this count alone could be between three per cent to four per cent. It’s mathematics and numbers don’t lie.
(The writer is an economist and chief spokesperson for BJP, Mumbai unit)

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