The bold and courageous move by Prime Minister Narendra Modi of ceasing Rs 500 and Rs 1000 currency notes as legal tender strikes at the heart of corruption, black money and money laundering. With a single stroke, the Prime Minister has taken action against the parallel economy in the country and encouraged greater formalisation of the economic processes.
Corruption is widely recognised as akin to a levy on economic activity and impacts the poor and middle class sections of society disproportionately. It also raises the costs and risks of doing business.
Estimates regarding the underground economy in India extend to as much as half the country’s GDP. It is believed that tax evasion, money laundering, and other illegal economic activities foster greater inequalities while also detracting from global competitiveness of the nation.
Since assuming charge, the Modi government has issued several campaigns to tackle black money such as the agreement with Mauritius, disclosure law regarding foreign holdings of unaccounted wealth, and the recent income disclosure scheme, among others. Taken together with the recent actions for introducing the GST, promoting digital financial inclusion through the Jan Dhan Yojana, and expansion of the direct benefits transfer scheme, we believe that this is a transformational step in governance. Further, the informal economy which largely operates on cash transactions can be discouraged through this measure. With wider use of smart phones and internet, it could be possible to minimise cash transactions which would allow tracking of unaccounted money.
In turn, this could be positive for extending the tax net and garnering more resources for the government. Further, inflationary pressures are likely to subside with this strong action. Hoarding and black marketeering would also be discouraged. For legitimate businesses, especially large enterprises, there may be short-term disruption and inconvenience. In the longer term, these would be smoothened out.
For small businesses, traders, and farmers, there is need to increase accessibility to formal finance avenues to undertake daily activities. They should have access to banks within accessible distance of banks to deposit the day’s revenues. Households especially those in remote areas should also be linked effectively to banks.
In the initial phase of the transition, there may be a likely impact on deflation, especially in the sectors which see large cash volumes, as the black money is sucked out of the system. Care must be taken that these are temporary and do not become entrenched.Indian industry welcomes the move.
(The writer is CII President)