Withdrawal of big currency to inject more liquidity into the system
The eventual benefit to the economy will be the increased liquidity, which will beat down interest rates. More money at lower rates will be available to companies and individualseditorials Updated: Nov 09, 2016 20:46 IST
Two lines about one sector tell the story of Prime Minister Narendra Modi’s latest strike against black money: The real estate sector will suffer in the short term; buyers and the economy will benefit in the long term. Real estate, because of its ill-kept secret that black money greases most house and land purchases, is an obvious parable for the impact of the government’s decision to stop the use of Rs. 500 and Rs. 1,000 notes. But this story of short-term pain and long-term gain is what you can expect to see replicated everywhere.
How much the pain and how much the gain will depend on execution and how soon the government tackles the imponderables. How quickly can ATMs be stashed with 100 rupee notes and how much, how long are the queues before them and bank branches, how do banks deal with increased flow of currency, what do they do with the inevitable surge in deposits, how do e-commerce companies deal with cash on delivery, how do retail stores cope since three-fourths of transactions at even supermarkets is in cash, what happens to the swathes that do not have a bank, ATM, or post office?
The swiftness, secrecy, and audacity of Tuesday’s move take the breath away, leaving some feeling stranded. Those who were travelling to another city, those who had to buy a meal the next day, those visiting the local kirana shop late Tuesday night have complained. Elderly people who will have to make several visits to an ATM or a bank to withdraw money, given the withdrawal limits, will complain. But this is the small picture. The big picture is the impact on the economy.
The years of Parliament election show an extra fillip in the gross domestic product growth. Cash comes out of mattresses and from rooms with peeling walls during campaigns and joins the mainstream to spur activity and payments. An amount of Rs. 16.42 lakh crore is in circulation as cash – most of it to avoid taxes. Eighty-five percent of that cash is in denominations of Rs. 500 and Rs. 1,000.
Tuesday’s move, just like a big election, can pull cash out of its hiding places. The benefit to the economy will be balm for the short-term wounds. The government will collect more taxes, which can be spent on infrastructure and welfare schemes. The increased liquidity will beat down interest rates. More money at lower rates will be available to companies and individuals. And we will all be part of – speaking without bias – a fairer economy.