The move to demonetise high denomination notes is a “masterstroke” that is likely to strike a blow at the heart of the illegal economy in India, the Confederation of Indian Industry (CII) said on Sunday. “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. This negatively affects the business environment, especially for those who comply with the law of the land and follow ethical practices,” CII said in a statement here.
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“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,” it said.
Noting that prevalence of cash use has also made India prone to high inflation, Director General CII Chandrajit Banerjee said 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,” he said.
“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 added. The CII said old currency notes will be deposited with banks and more households will find it imperative to open bank accounts and make use of card payments.
“This is also a great opportunity to transition to a ‘plastic economy’, where there is a prevalence of debit and credit cards for transactions,” CII said. “The biggest gain from this move will be greater formalisation of the economy. Currently, the costs of informality are evident in low tax base which impacts government revenues, lack of economic control through monetary instruments and lower economies of scale.
“India’s tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent, which is much lower than about 21 per cent in other emerging economies,” it added. Describing it as a historic move, CII said the existence of a parallel economy provides unfair competition to organised industry which pays taxes and complies with standards.