However, it is also becoming clearer how the government expects the demonetisation to shore up its finances. In the initial days post demonetisation, the theory propounded by many research houses was that the government expected to get the money via the RBI route. That is, if 20 per cent or more old notes never came back to the banks, the RBI could extinguish its liabilities to that extent. In turn, this would require assets to be sold by the RBI to balance its books. The profits could be passed on to the government through some sort of special dividend.
The view now is that the government might bank on tax revenues instead. There will be changes to the I-T Act to tax at the rate of 60 per cent (or more) the old cash deposited in an account that is above a threshold. Any way you look at it, it is clear that the government's finances will improve sharply.
Meanwhile, after demonetisation, there is a sharp slowdown in consumption and other issues. Anecdotal evidence suggests that small businessmen have been the worst hit because a large chunk of their linkages - whether payments to workers or payments to raw material suppliers - have been in cash traditionally. There are reports of layoffs, though no formal data has been collated. Various research bodies are venturing to give estimates of the short-term slowdown to GDP growth. Meanwhile, there have been gainers as well. Organised retail, which was prepared for digital payments, is gaining at the expense of mom-and-pop shops. Fintech companies have been on a roll. But a range of sectors ranging from automobiles to construction have been hit hard.
What will be the final effects and what will be the long-term gains to the economy because of demonetisation? Our cover story this issue looks at it. We also look at the effects of the move on black money generation and circulation, and on the banking system in our cover package this issue.
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