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On the heels of the Income Disclosure Scheme that ended on September 30, Prime Minister Narendra Modi’s announcement of demonetisation is being perceived as the next step in the government’s efforts to curb black money.
“The discontinuation is a welcome step to control fake currency and black money. There may be some inconvenience to general consumers in the short run, however; this inconvenience is worthwhile for long-term gain,” said Devendra Kumar Pant, Chief Economist and Senior Director (Head - Public Finance), India Ratings & Research.
According to Mukesh Butani, Managing Partner, BMR Legal, “A combination of national security concerns and wider agenda to filter out unaccounted income guided the government to make this move.
“The timing was perfect — a month after closure of the income disclosure week and a week after Diwali.” The impact of short-term disruption in the festive period was, thereby, minimised, he added.
Anis Chakravarty, Lead Economist, Deloitte in India. said: “The government has passed arguably the largest reform to counter the black money and parallel economy threat.”
“As generally expected, there is likely to be a disruption in the liquidity situation as households will get affected by the note exchange terms as laid by the government. Commodity and the general cash market transactions are likely to feel the immediate impact.
“On the macroeconomic front, we could see some appreciation of the domestic currency as the notes in circulation will decrease. This is likely to have a negative impact on trade. Counter moves by the government are expected to ease this, though growth in the current quarter will likely fall,” Chakravarty said. However, the RBI has maintained that there will be no impact on liquidity and financial markets.
On a sectoral basis, the commodities and agricultural sector, including the market for consumer non-durables, is expected to feel the heat, Chakravarty said.
However, he expects the largest negative impact in the medium to long term to be on the real-estate sector.
On a positive note, there will be a reset of expectations as this represents, in the long term, a big push to the cashless economy and the fin-tech sector is expected to see gains.
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