Taking the whole country by surprise, Narendra Modi has pulled off a
shocking move to demonetize higher value currency notes as he waged war on the
evil of black money in Asia’s third biggest economy.
While it’s hard not to overlook the short-term repercussions of wiping
out Rs 500 and Rs 1000 notes which comprise 86 per cent of total value of
currency in circulation, the long-term implications of demonetization are seen
as positive.
Demonetization has sent out a strong message about the country’s
anti-corruption drive which will improve investment sentiment in the long-run.
While the sudden cash crunch may have crippled the common man,
demonetization marks
a crucial step in India’s bid to transform into a cashless economy.
With cash-intensive sectors such as food, transport, real estate and
restaurants likely to be severely hit, this fiscal’s GDP could be squeezed by
0.8 to 1 per cent. In the longer term, demonetization may help bolster economic
growth as more and
more of the informal economy becomes formal and the Goods and Services Tax
comes into play.
Successful unearthing of unaccountable money could propel tax gains for
the government, good news for India’s fiscal deficit.
An interest rate cut also looks likely on the cards in the coming months
as a cash squeeze exerts downward pressure on consumer food prices amid lower
purchases. Lower borrowing costs will augur well for India Inc. particularly
rate-sensitive sectors such as auto and banking. Also, the withdrawal limits on
cash will propel faster growth of bank deposits, supporting lower long-term
deposit and lending rates.
Looking beyond the long queues
outside banks and ATMs, wobbly stock markets and short-term consumption &
growth squeeze, Modi’s latest reform is a well-thought out one. The key to its
success lies in its implementation.
The bottom line -No gain without
pain!
Latin Manharlal Group
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