India: Government Withdraws Currency to Choke Parallel Economy

In a bold move, India’s Prime Minister demonetized certain currency notes earlier this month. This announcement sent shockwaves throughout the country and took everyone by surprise. However, despite the numerous hardships most citizens seem to be favouring the move in anticipation of long-term gains for the economy. Further, the Government has also come out with a report card of each State’s performance States on ease of doing business. The high growth in FDI post the Make in India initiative has now been made official.

Demonetisation – Mr Narendra Modi made a dramatic announcement on November 8, 2016, withdrawing the two largest Indian currency notes INR 1000 and INR 500 with effect from that midnight. He addressed the nation on national television and radio at 8 p.m. when all banks had closed for the day and sent their daily reports.

The Government issued gazette notification no. 2652 dated November 8, 2016, citing storage of large amounts of unaccounted wealth in these high denomination bank notes coupled with the large circulation of fake currency in these notes (which were being used for drug trafficking and terrorism) as primary causes for adverse effects on the economy.

Thereafter the Reserve Bank of India (India’s central bank) issued a detailed circular and proposed various steps to monitor and replace the discontinued legal tender and issue new currency notes of INR 2000 and INR 500 with daily withdrawal limits. The current deadline to deposit the old tender is December 30, 2016. Although cash transactions almost came to a standstill, other modes like payments through cheques and electronic modes remained completely unaffected.

Apart from unexpected problems which have cropped up, massive amounts of unaccounted cash have already surfaced either in banks or simply dumped in garbage bins or in some circumstances in burnt conditions, giving credibility to the Government’s findings. The income tax department is actively scrutinizing sources of income.

It would only be fair to mention that although the Government kept this move a complete secret, it had prepared the country in advance by taking steps since it came to power in 2014 – the opportunity to open zero-balance bank accounts, subsidized insurance coverage, linking of Aadhaar (unique personal identity) cards with bank accounts, ample opportunity to voluntarily declare black money and disclose unaccounted income without any prosecution.

The overall effect is regularly debated, fuelled majorly by partisan and misleading media coverage majorly highlighting only the pains and rarely harping on economic benefits. However, the general public, who were caught unawares, is still grappling with the current situation with the only hope that it shall be beneficial for the economy in the long run.

The bright spot is the correction in financial dealings such as the immediate reduction in the hitherto highly inflated property prices due to the investment of unaccounted cash in the real estate sector. The regularization in the flow of money through the right channels is inter alia expected to increase infrastructure spending, lower taxes, and improve welfare and economic governance, which will surely boost future foreign investment.

World Bank Doing Business Report 2017 – The World Bank Ease of Doing Business 2017 report has ranked India at 130, just one rank above last year’s revised ranking of 131. The government showed its disappointment by claiming that reforms undertaken by it and the states have not been adequately captured in the rankings released.

The Confederation of Indian Industry (CII) said that the World Bank rankings are “incompletely reflective” of the changes in India’s business environment. CII felt that certain reforms such as legislations of the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code, and others may not have come within the World Bank’s deadline of June 1.

Assessment of State Implementation of Business Reforms 2015-16 – The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, in partnership with the World Bank Group, recently released the results of the Assessment of State Implementation of Business Reforms 2015-16.

The Assessment studies the extent to which Indian States have implemented DIPP’s 340-point Business Reform Action Plan (BRAP) for States/Union Territories covering the period July 1, 2015, to June 30, 2016. The BRAP includes recommendations for reforms on 58 regulatory processes, policies, practices or procedures spread across 10 reform areas spanning the lifecycle of a typical business. Data for this assessment was collected from State Governments on the BRAP portal.

The portal, among the first of its kind globally, allowed State governments to submit evidence of implemented reforms. These submissions were reviewed by the World Bank team and validated by DIPP’s team to study whether they met the objectives of the BRAP. The national implementation average significantly increased to 48.93% from 32% last year. The top 10 States are as follows:

FDI jumps 60% after Make in India – Union Commerce and Industry Minister Nirmala Sitharaman said in a written reply to the Lok Sabha (lower House of Indian Parliament) that during the period October 2014 to September 2016, total FDI equity inflows of USD 77.86 billion was recorded as against USD 48.47 billion received during the preceding 24 months with an increase of 60 per cent. She further said that there has been an “unprecedented” increase in FDI in the country after launching this initiative.