Do you know about demonetisation gains of Modi government

Rush for Cash: Waiting in line for hours at banks (Photo credit: @globalissuesweb)

After a day's break queues were back outside banks Tuesday morning. SBI chairperson Arundhati Bhattacharya claimed that the queues were getting shorter. However, these are still huge.

But, while the nation stands in queue to get hold of valid currency notes, did you wonder what benefit the government would have from demonetisation move? No?

The next few minutes will help you grasp the benefits for the government and also the immediate negative impact of what is being hailed as a historic and bold decision of the Nrlarendra Modi government.

We begin with the immediate and perhaps negative implications of demonetisation move, which the Congress and former union finance minister P Chidambaram call as mere note change policy implemented poorly.

We will raise this issue in parliament; you will see that money he acquires from you,will be used to fill pockets of industrialists: RGandhi pic.twitter.com/MOiCjfFykJ

— ANI (@ANI_news) November 16, 2016

DEMONETISATION PROBLEMS

Demonetisation has come as a nightmare for the cash logistics industry of the country. To pull back invalid currency notes from over the vast expanse of the country; to fill over 2 lakh ATMs along the length and width of India and to recalibrate and fill all the ATMs have come as a crippling challenge to the relatively new sector.

Long queues outside banks and frustration of people with the empty ATMs are the obvious effects of the entire process. Banks are not functioning the way they should despite the exemplary dedication and resolve shown by the bank staff.

The demonetisation is likely to slowdown consumer spending impeding growth of the FMCG sector due to limited cash availability.

Real estate, jewellery, electronics and other cash dominated and luxury items related sectors would also slow down.

The next quarter GDP figures may also report a slowdown with rural India showing major decline as villages and small urban pockets are hugely cash dependent. Low consumption would entail low growth figures for industries and development statistics of the government.

86% of the currency in the markets was 500/1000 notes, was scrapped by just one announcement. Was it all black?: Anand Sharma,Cong in RS pic.twitter.com/sdEL3p8xam

— ANI (@ANI_news) November 16, 2016

But, after initial hiccups, the results are likely to outweigh the inconvenience caused to people. It is expected that over the period of acceptance of invalidated currency notes in banks, some Rs 4-5 lakh crores will be deposited - money that was not in the banking system.

DEMONETISATION GAINS

A substantial portion of the deposits will be withdrawn as people are frantically depositing their money in banks but they will need money in immediate future. Still, some Rs 3 lakh are expected to remain with banks.

Now consider economics. Every currency note issued by the RBI is a liability on the government. So, those who, likely to be unaccounted money holders, don’t deposit their stacked cash will help government shed off fiscal liabilities.

Those who declare their unaccounted cash thinking whatever they get after paying taxes and penalty is better than burning the stock of old currency. Declaration of black money will make government richer by 60-70% in each case.

Still some people will try to find ways- if reports are to be believed they already are in the business- to short circuit demonetisation and launder their money. But, even this goes in government’s favour as hidden money will come into circulation.

So, where all this leads to? Some enthusiastic calculators have estimated that approximately 50 per cent of the 86 per cent of money in circulation as represented in Rs 500 and Rs 1,000 denominations before being demonetised, was illegal or unaccounted or in simpler terms, black money, for which tax was not paid.

This means around Rs 7 lakh crores will either be extinguished as liability or 60-70% of it will come 

to the government coffers by means of tax incidence or penalty for not paying tax in the year of earning. It will enrich the RBI-government combine by approximately Rs 5 lakh crores over the years - the income tax department is bound to take years for calculating the tax liability of each individual depositor after assessing their case. This amount looks an exaggerated one but even a half of it will be enough for the government to wipe out half of the fiscal deficit.

As per the 2016-17 budget document, the fiscal deficit target is to keep it below Rs.5.33 lakh crore or 3.5% of the GDP. Some experts haveestimated that the demonetisation decision will bring something to tune of Rs 3-4 lakh crores.

Sabhi parties se sahyog ki ummeed hai: PM Modi ahead of winter session of Parliament pic.twitter.com/4Y0dnGPadE

— ANI (@ANI_news) November 16, 2016

If such a huge fiscal deficit is bridged this year, it will provide windfall gains for the government in subsequent years.

With inflated chests, the banks will be in a position to reduce interests on both the deposits and loans. This would entail cheaper EMI on various loans. It would may push investment, which, in turn, lead to employment generation.

However, if backed with adequate tightening of loopholes in laws dealing with black money generation, the demonetisation move is likely to pay better dividends in post-2019 years.

Further, with limited cash in circulation, the inflation figures will favour the government.

And, finally, the demonetisation move is likely to give fa fillip to the banking system. An estimated Rs7-8 lakh crore new money will enter into banking, which may multiply by 3+4 times on account of re-circulation. But that may take, again, years.

But in any case, the Modi government can easily go to 2019-elections with good growth figures on its CV.

Delhi: TMC protests at Gandhi statue inside Parliament premises #DeMonetisation pic.twitter.com/KHzpJdM97O

— ANI (@ANI_news) November 16, 2016