UN publishes study on impact of demonetisation in India

The Dollar Business Bureau

It has been six months since the Modi-led government decided to invalidate more than 85% of cash in circulation. Curbing terror funding, boosting cashless economy and cracking down on counterfeit currency were among a host of reasons cited, the most critical one being elimination of black money from circulation.

The UN recently released a study titled ‘Potential Impact of Demonetisation in India’, which stated that demonetisation alone will not be able to uproot the seeds of black money. To prevent future flow of black money, the study said, other complementary measures would be required.

The Goods and Services Tax reform, voluntary disclosure of income scheme, the linking of taxation with unique identification numbers, were among the other supporting steps which are likely to enhance transparency and prevent undeclared wealth or assets from finding their way back into the economy.

‘Economic and Social Survey of Asia and Pacific 2017’, a report published by UN, stated, “The measure did not, by itself, impede future black money flows in new denominations. While estimates of the size of the black economy vary at about 20-25 per cent of GDP, cash is estimated to make up only about 10 per cent of that value.”

In favour of demonetisation, the study added, “In the medium-term, the currency initiative is expected to bring more economic activities into the formal sector and spur digitization of financial transactions, helping to broaden the tax base and secure the fiscal space needed for public social and infrastructure expenditures.”

“Moving towards a cashless economy will require addressing household determinants of cash dependence beyond technology adoption, including low financial inclusion, high informality, persistent gender inequality in access to finance, low financial literacy, low ICT infrastructure and large gaps in energy access,” the report spotted gaps in India’s digital drive.

The study predicted a GDP growth rate of 7.5% for India in 2018. A 25% increase announced for infrastructure spending during the budget, and a likely increase in public/private consumption are expected to contribute to a high growth rate. Inflation is likely to overshoot the target of 4.5-5%. Projections in the study estimate inflation levels in 2018 to rise to 5.3% - 5.5% in 2017 and 2018.

Expressing concern regarding the negative impact of non-performing assets accounting for 12% of assets in the public sector banks, the report stated that India’s financial sector needed recapitalization. On the other hand, amendment of the bankruptcy law and opening up of defence, pharmaceuticals and aviation sectors has raised hopes for a bight economic future.