The Confederation of Indian Industry (CII) today termed the Prime Minister’s move to demonetise Rs 500 and Rs 1,000 notes as a "masterstroke" and said it expects economy to emerge much stronger after a short period of some pain when it adjusts to the sudden withdrawal of cash.
"After a short period of some pain when the economy adjusts to the sudden withdrawal of cash, CII expects a much stronger economy. India's cash-dependence is extremely high with a currency-GDP ratio of around 12 per cent compared to 4-5 per cent in other developing countries," CII DG Chandrajit Banerjee said in a statement.
"High level of cash usage tends to slow down the flow of money through the economy. As we transition to a greater usage of fintech for payments, spending will rise, leading to additional economic growth. This is an economic masterstroke by the Prime Minister and must be allowed time to play out."
Banerjee observed that lower cash use will have a dampening impact on inflation and this will be a further positive for India's macro-fundamentals.
"The Reserve Bank will now have more room to cut interest rates as inflation subsides. Already, the bond market has reacted to the news with a reduction in the bond yields," Banerjee said.
The CII director general noted that the biggest gain from this move will be greater formalisation of the economy.
"Currently, the costs of informality are evident in low tax base which impacts government revenues, lack of economic control through monetary instruments, and lower economies of scale.
"India's tax base is low and its tax to GDP ratio needs to increase from the current level of 16.6 per cent, which is much lower than about 21 per cent in other emerging economies.
Less than 30 million Indians filed personal income tax, with more than half of these paying no tax," he noted.
CII in a statement said the prevalence of cash use has also made India prone to high inflation, adding corruption and excessive cash use tends to erode the purchasing power of money.
It further elaborated that this move will be positive for banks whose deposit mobilisation will be strengthened.
The old currency notes will be deposited with banks and more households will find it imperative to open bank accounts and make use of card payments.
Noting that currency in the form of Rs. 1,000 and Rs. 500 notes amounted to Rs. 14.2 lakh crore as of March 2016, or about 85 per cent of total currency in circulation, the industry body said if this is converted into current and savings deposits, there will be an increase in bank's liquidity.
Stressing that the existence of a parallel economy provides unfair competition to organised industry that pays taxes and complies with standards, the body felt such a decisive move will change the perception of India completely and bring about much-needed transparency.
(With PTI inputs)