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Demonetisation will destroy 12% of black money: India Ratings

By:  Ekta (Source: Times of India) , Place:  Coimbatore ,  Update:29 Dec 2016



The current measures by the government to withdraw high value notes are likely to destroy about Rs 4 lakh crore worth of cash held in black money and fake currency, which constitute about 12% of the black economy in India, leaving 88% of the black money to remain in the system, India Ratings and Research has estimated.


The economic cost of the de-legalisation will be Rs 1.5 lakh crore for 2016-17 (FY17), the agency, which has lowered its GDP (gross domestic product) growth forecast for the fiscal to 6.8%, 0.97% lower than its earlier projection.

"While there are no two opinions about the need to root out black income, the method chosen and its execution have inflicted unwarranted damage to the Indian economy," India Ratings, which is part of the Fitch Group, said.


"Global experience, including that of India, in the past has shown that the impact of such measures have been fairly short-lived as it does not attack/plug the mechanism that gives rise to black income," it said. India followed the de-legalisation route twice in the past, first in 1946 and then 1978.


"It is unlikely that fiscally the government will benefit from Rs 4.004 trillion (Rs. 4.004 lakh crore) worth of cash destroyed in the de-legalisation process," the agency stated. "On the contrary, government may face lower tax collections in the second half of FY17, due to the slowdown in economic activity," it said.


Although there are various estimates available about the size of the black economy in India, the World Bank had estimated the size of the black economy to be 23.2% of the GDP in 2007. "Assuming that this proportion has now gone up to 25%, the size of the black economy for FY16 works out to be Rs 33.9 trillion (Rs 33.9 lakh crore) (GDP for FY16 was Rs 135.76 trillion (Rs 135.76 lakh crore)," India Ratings said.


"It is well known that cash is only a small component of the black economy, and majority of the black income is held in the form of gold/jewellery, stocks, real estate and foreign currency," it said. "Therefore, how much of the black money will come out into the system is still difficult to assess. Moreover, there is a question mark on whether Rs 4 lakh crore worth of cash destroyed in the de-legalisation process could firstly become part of the RBI balance sheet and secondly become available to the government for spending," the agency stated.

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