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4 ways demonetisation has impacted the Indian economy
On November 8, 2016, the Indian government decided to scrap high-value banknotes of Rs 500 and Rs 1,000. The scrapping of 86% of India’s circulated currency was done to combat black money and counterfeit notes, and widen the country’s tax base. Fast-forward a year, we take stock of the impact demonetisation (DM) has had on the Indian economy.
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Tax collection:
The currency swap helped the government broaden its direct tax base “by over 25%”, according to India’s finance minister Arun Jaitley. The finance minister said the direct tax base had increased as people were “compelled to deposit the money in banks”, which eliminated anonymity of cash ownership.
Government data suggest that direct tax collection increased 15.8% year-over-year to Rs 3.86 lakh crore in the first half of the fiscal year.
Further, media reports, quoting government sources, stated the Indian government had added 9.1 million taxpayers in 2016-17.
Before the government’s cash scrap initiative, indirect taxes accounted for a large majority of the country’s tax revenue. But, inclusion of new taxpayers is likely to surge the country’s coffers in the long run. The country’s Prime Minister Narendra Modi has urged the income tax department to increase the tax base to 100 million taxpayers.
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Real estate:
Last year’s demonetisation (DM) has brought the real estate sector down to its knees.
Before the DM, this sector relied heavily on cash transactions. This is because the circle rates accounted for 30% of total value of the property, while the rest of it was paid in cash. Such transactions made this sector a safe haven for black money.
Now, thanks to the DM’s crusade against black money, people with black money are finding it hard to purchase property, which has consequently crippled the sector. The piling unsold inventory of residential and commercial properties has dealt a body blow to the companies dealing in properties.
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Interest rates:
DM urged people to deposit the old currency notes with the bank. The rise in cash deposits created excess liquidity in the banking system. Excess liquidity forced banks to cut interest rates faster than the Reserve Bank of India (RBI). This has resulted in lowering of lending and deposit rates.
The reduction of lending rates has made it easier for people to take loans, while falling deposit rates has resulted in more money being invested in the financial markets. The low returns on fixed deposits mean that people are exploring other investing avenues that promise higher returns.
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Mutual Fund:
Mutual funds became the biggest beneficiary due to the lowering deposit rates. Post demonetisation, financialization of savings has happened and there has been a 60% jump in mutual fund investments through systematic investment plans (SIPs).
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3,200 crore
Mobile wallets remain the biggest beneficiaries of demonetisation. People used mobile wallet extensively for transacting as cash supply declined. Mobile wallet transactions may rise from 22.54 crore in August 2017 to 3,200 crore by 2022, according to a Deloitte report.
