In a decisive battle against black money, Narendra Modi government yesterday announced the invalidity of the legal tender of Rs.500 & Rs.1000 preceded by the release of Rs.2000 currency notes. A similar kind of exercise was done by the Morarji Desai government in Jan17,1978 but India has never seen execution instituted at such a grand scale. The sheer audacity of the execution plan is not only commendable but also inspirational for businesses and corporations as not many people were aware of it even in the government circles.
Recent efforts around the voluntary disclosure scheme by the government did help them raise nearly $10 billion through a tax amnesty for Indians to declare hidden income and assets. This ruling will have far-reaching consequences on the Indian economy in both the short and medium-term.
Let`s try to look at the possible areas where we will see the impact:
- Terrorism and Drug Economy – With currency notes of bigger denominations going out of circulation, we will see a major crackdown on terrorist funding and counterfeit currency. This will go a long way in containing the terrorist activities and drug business in India which thrives on black money currently.
- Illegal immigrants – Illegal immigrants have always enjoyed the patronage of politicians in lieu of their vote-bank and ground-level support during elections. This ruling will make their livelihood difficult as they will not have any bank account unless they register with the government authorities and procure their Aadhar number.
- Corruption – This might sound a death knell for corruption in India because once cash goes out of circulation, it will be difficult for government officials to accept the bribe or any other kickbacks from people.
- Property & Real Estate – Property has always been a breeding ground and favorite investment spot for black money. With the recent ruling, this asset class will get a detoxification dose and it will emerge out as a more transparent and predictable asset class in the longer run. Prices will be impacted in the shorter run but overall it will cleanse the entire landscape of real estate in India.
- Business entities and Companies – With the availability of cash funding (by private money lenders, etc.) getting restricted, companies will now have to look for ways to fund their capital requirements from internal sources. They will have to be more disciplined in book-keeping and compliance from an accounting perspective. Bill Discounting will emerge as a popular product to fund the working capital requirements of businesses.
- Elections – It is still to be seen as to how will the expenses be managed to post the ban on these higher denominations currency notes given the prevalence of a large amount of cash during these election campaigns. It will create more transparency around the use of public money by the administrative authorities.
Overall, this might be a dampener in the short-term but it will herald a new era for India and will create a solid foundation for a better and brighter future ahead. Kudos to the PM!!