Demonetisation has become the demon word for much of India’s population in recent weeks. Though many agree with the policy, others complain about the manner it was implemented. It has been tough, confusing, desperate and smeared with dollops of patriotism, perhaps, to deviate the minds from its intricacies. The question, however, is: will demonetisation actually put an end to black money, which itself is a complicated entity and not restricted to currency. At best, the move is only curbing the black wealth accumulated in the form of cash and leaving out a massive amount of black wealth converted in form of gold, shares, foreign currency and other financial instruments away from the effects of demonetisation.
Black money is essentially income which is generated on a regular basis via unscrupulous means or accumulated unaccounted wealth to evade taxes among other reasons. It is a never ending exercise. The largest source of black money in the country is tax evasion. The government estimates that only about 3 per cent of Indians pay income taxes. Further, evasion of VAT, service tax, excise, customs are way too common.
Top experts in the country estimate that black money in cash is only about 1/20th of the black economy. Demonetisation is generally done in countries to save its economy from going bankrupt by immediately reducing liquidity in the system. Financial institutions remain a little stable.
The secrecy angle is clearly not helping in implementation of this decision.
The current situation risks affecting production, particularly in the agriculture sector. The consumption will fall drastically as well. CII has already estimated that retail sector has crashed by 50 percent. In terms of production, Kharif season has finished with the harvest in Maharashtra and northern states. East and south will see the end by December. When the time for sowing Rabi crop arrives, and if it gets delayed, as is being seen in parts of Punjab, Haryana, Gujarat etc, the impact would be much more grave in southern India and eastern states.
In such a situation of disruption in production, job creation is threatened and income generation is seriously undermined. In the near future, inflation rates will fall due to low levels of liquidity, but in the longer run, the risk is much higher for prices to increase sharply as the moment figures of low produce of Rabi crop are announced, fears of shortage will drive up the prices.
Private investment industry has also taken a hit with investors holding on to their investments in times of heightened uncertainty. Till there is some solid confidence instilled in the financial system, investors are likely to hold investments even in lower interest rates.
Economists are predicting a fall in GDP for this year by around 0.5 per cent and is expected to be around 7 percent, which is a major letdown. The impact is expected to last around 4 quarters before the economy sees any growth in GDP and the quantum of growth, realistically speaking, is highly unlikely to touch figures it dropped from which is 7.6 per cent.
The informal sector, which is the largest employer in the country, primarily for unskilled workers, is also expected to take a hit in for a lasting period. The sector is driven mainly on money from financial institutions of the informal financial market. These institutions include chit funds, money lenders and hundis. The major effect will be seen on the cash holdings of these bodies. The dip in their holdings will take a while to come back to their previous levels. It remains to be seen that if the sectors which can tap into banking credit or formal credit are able to bear the the tide.