Black Money Battle Hampers Business

A demonetization drive dubbed as the largest globally, spearheaded by prime minister Narendra Modi, is already having huge impact on India’s $ 2.2 trillion economy.

The government announced bans in November on two types of large-denomination notes, requiring citizens to trade in the cash for new currency. These banned notes, valued at $207 billion, account for 86% of India’s currency in circulation. Many observers believe the move will put short-term pressure on the economy, but demonetization will have a positive impact in the long run.

Dharmakirti Joshi, chief economist at credit ratings agency Standard & Poor’s Indian arm, Crisil, says, “We expect lower private consumption in the financial year ending March 2017, but demand should revive and growth rebound in the next fiscal [year] to an 8% trajectory.”

Reports from across 29 states and seven union territories suggest huge disruption in economic activity in high-consumption sectors such as retail, real estate, gems and jewelry, and hospitality, which depend on cash transactions for as much as 80% of their business. Since the announcement, people have spent days in serpentine queues at banks for new notes, day laborers have gone unpaid and consumers have deferred purchases of goods and services.

But unfazed government officials are confident that the drive undertaken after 38 years will deal a body blow to “black money” stashed away by tax evaders, terror financiers and counterfeiters.Finance minister Arun Jaitley says, “Long-term gain would far outweigh the short-term pain experienced by people till December 30.”

The Reserve Bank of India has estimated economic growth to have been trimmed by half a percentage point, to 7.1%, in the current fiscal year. Manila-based Asian Development Bank has reduced its growth outlook to 7% as a direct result of demonetization.

The Modi government has used demonetization as an opportunity to push for digital payments by offering incentives and financial concessions to expand tax compliance, to promote transparency in investment and trade and to curtail the use of cash.

Former prime minister and renowned economist Manmohan Singh, however, describes demonetization as a “monumental management failure” that will pull down Indian GDP by as much as two percentage points.