There is a lot of hue and cry about the recent demonetization of large value currency (500 & 1000) by the government. The opinion of economic pundits worldwide is split on the merit of the move with some calling it a brave, progressive, and futuristic move while other are taking a more pessimistic – wait and watch approach. While the government is of the firm view, that demonetization will weed out black money and its vices with far reaching benefits not only in long term but short term as well. Let us deep dive into the Indian economy to understand how deep rooted the black money or shadow economy is.
India is currently ranked as 7th largest economy in the world with GDP of US$2.07 Trillionor 3.38% of world’s GDP (source: IMF, Outlokk 2016). Out of this, 26% (approx. 27 lakh crores) or 1/4thof the GDB is the untaxed, unaccounted or non-scrutinized (source: McKinsey & Company, 2013) and highest in terms of volume in the world.This untaxed money or commonly known as black money is housed in different form such as cash, gold, jewellery, property, foreign currency, and in foreign accounts. Cash alone accounts for 12% or approx. 4.0lakh crores of black money (source:India Ratings and Research, 2016).
Though being the fastest growing economy in the world at 7.6% (source: World Bank Data, 2015) the majority or 68% of the business transactions by value and 98% by volume (source: PWC, 2015) in India happen through cash (source: CLSA), which is the highest in world.Compared to other major economies such as China and the US with 45% and 14% respectively (source: PWC, 2015) of the transactional value, India needs to make long strides. These cash transaction are one of the major source of black money. Demonetization is one such step to weed out black money from the system, encourage digital transactions, and make Indian society digitally savvy.
Demonetization has helped India make long strides towards weeding out black money.
- It is estimated that approximately 2.5 lakh crores of cash which was in circulation prior to 8th November, 2016 has not been deposited in banks (source: Economic Research Department of State Bank of India). This comprised primarily of counterfeit currency and high volume cash hoarding. This short fall of 2.5 lac crores of black money has directly been removed from the economy and will serve as a dividend for the government in this fiscal.
- Nearly, 13.7 lakh crores (source: unconfirmed) that has been deposited in the banks is being closely scrutinized by the IncomeTax department. All the bank accounts including Jan Dhan accountsin which more than 2.5 lakhs cash has been deposited have been put under the lens. All these account holders will get a notice to explain the source of cash and if not satisfactory these might be confiscated. This money will serve as an income for the government.
- Terror funding that was primarily done through cash and counterfeit noteshas been completely eliminated. Terrorist organizations and their handler have been shocked to see their funds melt away. This has helped in reducing the terror strikes. Many regions which were tense earlier are now back to normalcy.
- On the psychological front, people have become aware of the fact that black money is a curse that our society has been carrying for a long time. They have also realized that there are multiple merits in adopting cash-less modes of transactions. This awareness will help the Indian society to adopt electronic / digital modes quickly and participate in nation building.
Finally, demonetizationneeds to be looked at as an elixir or medicinal potion that tastes bitter but cures the disease.
CA Sunil Kumar Gupta
Business Expert, Economist, Author & Philonthropist