Ever since India’s Prime Minister Narendra Modi announced the demonetization of high value currency, there have been repeated reports that the Indian economy has slowed down considerably.
While the government has pointed out that Rabi crop sowing has not slowed down and has only increased in the post demonetization period to highlight the fact that demonetization has no negative fundamental impact on growth and government has also pointed out that any slow down in other sectors are only temporary and not alarming, the media reports of note ban putting brake on the economy is persisting.
The latest news in the media is that the two wheeler, passenger vehicle and commercial vehicle sales have slumped and declined due to the note ban. Further, it is said that there has been revenue loss to the real estate industry to the level of around Rs.22600 cr. and the notional loss on stamp duty for the state governments is Rs.1200 Cr. The sales volume and launches of new projects have fallen by 23%.
The fact is that the demonetization only resulted in the withdrawal of high value currency notes. Transactions by cheque, bank transfers, credit/debit cards have continued without change.
The price of two wheelers and four wheelers are in the range of Rupees one lakh and above and there is no reason why such transactions should slow down because of demonetization. Obviously, this indicates that most of such transactions in the pre demonetization period have been taking place by cash (black money) and putting a brake on black money, hawala money and counterfeit notes have resulted in slow down in the sale of the automobiles.
The above reason is also applicable for the slow down in the real estate sector. It is very well known that in the last several years, most of the black money is dumped in the real estate by the tax evaders and black money holders, as a result of which the price of real estate has gone up by leaps and bounds, making it impossible for the people in the lower and lower middle income group to fulfill their dream of buying and owning a house.
Dr. Manmohan Singh’s misconception
Since demonetization on 8th November, 2016, some of the discretionary spending items such as lavish weddings have been impacted because a lot of black money is used for such expenses. The industries and other commercial sector, which are dependent for their business on spending in such highly discretionary items have been impacted, which is a short term happening.
The misleading campaign is that drop in such discretionary spending will lead to economic shock and contraction as growth in consumer consumption is a significant driver of economic growth. The former Prime Minister Dr. Manmohan Singh, who should know better, has said that worst things are yet to happen in the country due to demonetization.
Should India allow parallel economy to persist?
Now, the question arises as to whether India should allow a parallel economy and growth based on ill-gained and tax-evaded money, which is at the cost of genuine tax payers and quality growth of he economy and the country?
This is precisely the objective of demonetization to reduce the role of black money in the economy and if the auto sales and real estate growth have really gone down after the demonetization shock, it only shows that the impact of black money in the economy has been considerably reduced and demonetization has a positive impact and is providing the expected results.
The recent demonetization had brought to light how the tax evaders had worked in connivance with corrupt officials to defeat the very process of clean up of the monetary system & tax governance .
Transparency in economic activity is the need of the day
Unmindful of the misleading information on demonetization being spread by some quarters and widely publicized in the media, Modi government should take stern action against the corrupt activities ruthlessly.
Of course, it has become difficult to enforce tax discipline in the country, since the legal system in India is not conducive for early disposal of cases and this again emboldens the corrupt elements. Had only the judicial system is more effective , many of the today’s black money holders and corrupt persons would have already been put behind bars.
With the black money largely gone, the economy will be back on healthy growth path soon when the transparent dealings would inevitably happen.