Four strictly economic reasons why Modi deserves to be praised for note ban

It's been more than a month since Prime Minister Narendra Modi scrapped 86 per cent of India's high-value currency notes in circulation on November 8.

The government calls it a historic step that will translate into an economic revolution in the years to come.

However, last one month did not go well for the government or the Prime Minister as the opposition and some top economists attacked the authorities for miscalculating the transition cost that the country will have to bear in the process.

There is no dispute that demonetisation has hit the growth prospect of the Indian economy in short-run, however top economists still believe, if all things go as planned, it will transform the country.

ALSO READ: No concrete data to estimate impact of demonetisation on GDP: Chief statistician

Interest Rates will Come Down
New Development Bank President KV Kamath has said that massive inflow of funds post demonetisation will help banks to cut the interest rate by over 1 per cent.

In an Interview to Economic Times, Kamath said: "My own assessment sitting outside is that we should be looking at over 1 per cent drop in interest rates within the next six months. I can't see how banks cannot drop deposit rates. And I cannot see how in monetary policy context you cannot drop policy rates."

"The interest rate correction gives one big comfort. The treasury gains on mark-to-market for banks so far is Rs 1 trillion. And, another 1 per cent rate cut should lead to another Rs 1.5 trillion of gains. That is a good Rs 2.5 trillion gains coming to the banks," Kamath explained.

He also said that authorities will have to drop rates because of inflation coming under control.

"This has several positives that will drive economy after a short hiccup. The main positive is the huge pickup in the retail consumption sector whether it is homes, cars or motorcycles, everything that happened when interest rates dropped in 2003-2004 when mortgages were 14 per cent that came to 8 per cent. Then the economy started taking off," he explained.

Large Expenditure in Social Welfare Schemes
Eminent economist Jagdish Bhagwati writes in his blog that the massive deposits with banks post demonetisation may push the government for slight increase in expenditures of various social programmes.

"Aund 80 per cent of the currency in higher denominations has now been deposited back into bank accounts. Since individual deposits will now be matched with their tax returns and unaccounted deposits will be taxed, this will yield a windfall for the government permitting large increases in social expenditures," Bhagwati said.

According to a latest RBI report, the banks have received 12.44 trillion rupees of high-value currency after demonetisation.

Low Income Tax Rates in the Offing
Finance Minister Arun Jaitley has hinted at lower direct and indirect tax rates in future as demonetisation results in higher tax revenues from unaccounted wealth coming into the system.

Earlier in the week, Jaitley said that future transactions would be substantially digital as India moves towards a less-cash society.

"Once they are substantially digital they get caught in tax net. Therefore, the future taxation level would be much higher than what is currently being collected. This would also enable the government at some stage to make taxes more reasonable which will apply to both direct and indirect taxes," he further said.

Jaitley also said that the digitisation will bring down levels of tax evasion.

Digitisation of Financial Services
Former UIDAI Chairman Nandan Nilekani hailed government's demonetisaion move and said that it would see a massive activation of digitisation of financial services in the country.

He also said that Aadhaar, UPI, USSD and micro ATMs will help India accelerate the roll out of digital financial services. "What would have taken another 3-6 years to get rolled out, I now believe because of the urgency of the matter, will happen in 3-6 months," Nilekani told NDTV.

"The more important thing is when the economy becomes formal, when everybody's financial transactions are digitised ...India is going to go from data poor to data rich and that will make it more and more difficult for people to do dishonest things or to be outside the system. You will reduce the amount of black money in the system," he explained.