Demonetisation a body blow to terror funding, corruption: CII

The government's sudden move to demonetise high denomination notes of Rs500 and Rs1,000 has struck a body blow to the terror funding mechanism and is likely to have far-reaching impact on the economy, the Confederation of Indian Industry (CII) stated in a Press release on Saturday. Demonetisation is also a masterstroke by the Indian government against corruption as well, it added.

''While it is not possible to have a firm estimate of unaccounted wealth, it is widely estimated at around a fifth of India's GDP or around $450 billion. While some of this may be stored in cash, some may be in assets such as real estate and jewellery. This negatively affects the business environment, especially for those who comply with the law of the land and follow ethical practices,'' CII claimed in the press statement.

''After a short period of some pain when the economy adjusts to the sudden withdrawal of cash, CII expects a much stronger economy. India's cash-dependence is extremely high with a currency-GDP ratio of around 12 per cent compared to 4-5 per cent in other developing countries. High level of cash usage tends to slow down the flow of money through the economy. As we transition to a greater usage of fintech for payments, spending will rise leading to additional economic growth. This is an economic masterstroke by the Prime Minister and must be allowed time to play out,'' said Chandrajit Banerjee, director general of CII.

He also pointed to the high prevalence of cash use as one reason for the high rate of inflation in the country. He said, corruption and excessive cash use tends to erode the purchasing power of money. Lower cash use will have a dampening impact on corruption and inflation, which in turn will further improve India's macro-fundamentals, he added.

''The Reserve Bank will now have more room to cut interest rates as inflation subsides. Already, the bond market has reacted to the news with a reduction in the bond yields,'' Banerjee observed.

The CII release also said the move will also be positive for banks whose deposit mobilisation will be strengthened. With more households opening bank accounts, the use of cards for payment will also increase.

High-denomination currency notes of Rs1,000 and Rs500 denomination accounted for a total value of Rs14,20,000 crore or 85 per cent of money in circulation as of March 2016. If at least half of this is converted to current and savings deposits, there will be huge an increase in banks' liquidity. This is also a great opportunity to transition to a ''plastic economy'', where there is a prevalence of debit and credit cards for transactions, CII said in the release.

CII, however, does not expect all the Rs14,00,000 crore of high-denomination currency to return to the banking system, as holders fear these accounts will be scrutinised. Obviously, RBI will have to print more notes to replace these.

''The biggest gain from this move will be greater formalisation of the economy. Currently, the costs of informality are evident in low tax base which impacts government revenues, lack of economic control through monetary instruments, and lower economies of scale. India's tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent, which is much lower than about 21 per cent in other emerging economies. Less than 30 million Indians filed personal income tax with more than half of these paying no tax'' said the CII Director General.

The demonetisation of high denomination notes is ultimately a strong message that goes out to all those who used cash for illicit activities. A big blow has been dealt to those who engaged in corruption and took cash bribes. The message will have far-reaching implications for those who indulge in such illicit activities. This would greatly curb such transactions and will be a body blow to corruption, racketeering, human trafficking, gambling, and other such activities which vitiate the entire security system of the country, said the CII release.

For industry, this is indeed a historic and welcome move with very positive implications. The existence of a parallel economy provides unfair competition to organised industry which pays taxes and complies with standards. Such a decisive move will change the perception of India completely and bring about much-needed transparency. It will prevent people from violating the law with impunity even for daily business transactions, CII said.