“There could be a short term adverse, or, say knock-on effect on India’s GDP as it would increase costs for the unorganized/ unincorporated/ unaccounted economy which comprises mostly – construction, trading and logistic back hand suppliers (like that of outsourcing), and unaccounted illegal activities, who mostly work on cash-in-hand deals as well as purge of liquidity for the fear of income tax authority.
But demonetization may have multiple positive effects in collecting tax, unearthing existing black money & reducing inflation. Also, one side-kick take away for the government is – fiscal consolidation since banks may be swelled with new cash and hence bond market would be happier. Further, I also guess that it would facilitate Goods & Service Tax.
In this way, it is a clever one-stroke santisation. However, as economic policy making is not only about what effect it has on recent future but more so about nudging and bringing in behavioral changes & cultural practices, i.e., from a system of unaccounted cash-carry to a system of production generating activity through accountable bank or financial based transactions.
Only institutional reforms and an accountable system can provide credibility to this move. Therefore, one can read it as:
- One time knock-on sanitisation,
- Nudging cultural behaviour (cash based transaction to digital/bank based), and
- Making GST implementation effective (Tax Credit).
I hope this signals a beginning of cleansing the system through a slew of comprehensive reform measures rather than being end up in once-for-all measure, as many, in their exuberance, wrongly term it as a surgical strike for sanitsation only.”
M.Phil (JNU), Ph.D. (University of Mumbai)
Professor of Economics
Business Environment Area
Indian Institute of Management Lucknow