is unprecedented in its scope and reach. It has impacted almost every Indian citizen. Therefore, nobody knows precisely how will the nation recover and how the economy will get back its lubricant. Nobody has sympathy for corrupt politicians or officials who have huge piles of cash. But we feel for a truck driver who is not able to buy his meal or a worker waiting in queue for hours only to discover that the bank branch has run out of cash.
What the government wants is to control use of black money or cash on which income tax has not been paid and not use of cash itself. Why should then a father willing to withdraw cash from tax paid money for his daughter's wedding suffer? There are many poll-bound state governments who may exacerbate these inconveniences and try to derail the GST
(Goods and Services Tax) rollout plan. The government is working so hard on it and India needs it badly . It will be a pity if anything delays GST.
There are quite a few well meaning analysts and experts who expect a significant consumption or growth slowdown in the short term. If that happens, it would be the most significant casualty as growth deceleration will have an impact on employment and income levels of a vast majority of the country. About 80% of the Indian working population is engaged with micro, small enterprises and informal sectors.
To be fair to the government, their intent is just and the move is courageous. When it was announced, I was a strong vocal supporter but in the last few days, I have travelled to a few small towns and feel that the inconvenience caused to common man and fear of consumption slowing down are real risks.
A country, with millions of traders, dhabaas, hawkers without POS (point of sale) machines for credit cards or any other electronic payments or so, millions of jan dhan account holders who have never actually used their bank or cards, is shell shocked. At the same time, nobody can gainsay that there was an urgent need to address bludgeoning black money, fake currency and money being available for terror and drugs. There is consensus that a massive increase in deposits and increased use of formal channels will be positive in the long term.
The government has golden opportunity to act fast and mitigate the side effects on ordinary citizen as much as possible. Smaller measures are increasing availability of physical cash quickly and remove or relax cash withdrawal limits from ATM to at least Rs 20,000 and remove limits for withdrawal from banks. For long term, government and RBI should incentivise use of banking system and wallets like Paytm by removing all charges, increasing limits, driving penetration of electronic payments and educating the masses.
The bigger issue, however, is to ensure that economy's growth momentum does not slow down.The prosperity engine which just started chugging along should not be choked. While estimates vary , government's tax revenue will swell with this. There is also a major windfall likely, as Rs 14 lakh crore currency in circulation, which is liability on RBI's balance sheet, will shrink hugely as entire currency will not come back for remonetisation. While we need funds for infrastructure, a part of this windfall must go back to common man now.
The government must act swiftly and reduce indirect taxes on all consumption items across the board, including cars, two wheelers and cement. The government has to suffer revenue loss only for four months till GST
is rolled out. As post April 1, 2017, new GST rates in any case, will prevail.
In 2008, when country was faced with Asian crisis and demand slowdown, across the board cuts in indirect taxes did help the economy recover fast and almost unscathed. The slashing of taxes (as they matter only to honest tax payers and not ones who buy for cash from unaccounted money) will make people forget the pains of long queues to get their hard earned money back in small lots.This is because the hard-earned money would be able to buy more. Such bold moves will change sentiment of entire Indian business and consumers.
Also for direct taxes, the finance minister in the first Budget announced a roadmap to reduce direct taxes to 25% but ended up increasing the same in the second Budget. Whether surcharge or any other reason, the honest tax payer was unpleasantly surprised. Although direct tax cuts can be done in the Budget, the intent may be announced now.
Now that government has confidence of having reined the monster of black money , it must proactively reward and incentivise honest tax payers. The vast majority of population does not have black money . The government should not wait for the actual gains and results as that could be too late.
If Modi and Jaitley can act quickly to pass on the gains of surgical strikes on black money to those with white money, by tax cuts, we will see people smiling even in the queues at bank branches or outside dry ATMs. The economic growth will not face slowdown and may actually accelerate. Naysayers will be silenced.
The above article was published in The Economic Times on November 15, 2016