What Will We Do With All The Cash In The Banks?

What Will We Do With All The Cash In The Banks?

Almost all of the 86% by value of the demonetised cash in circulation is safely deposited in the banks. As 2017 wakes up and begins to stir, the cash economy has chosen to seamlessly join the official one.

Now the challenge for the Government is not only to catch whom to tax at penal rates, but to use this money to stimulate growth afresh.

Even before demonetisation, the private sector, unhappy over high interest rates, had been sitting on the side-lines.  It was the Government’s own infrastructure spending that was keeping the GDP rates growing.

The methodology envisaged now is to lend much more cheaply and widely than before.

This should encourage industry, agriculture, services, infrastructure, manufacturing, trading, consumption of white goods, two-wheelers, cars, housing.

Adding on to the stimulus of the 7^th Pay Commission and one- rank-one-pension (OROP) initiatives, the economy should benefit substantially going forward.

The public-sector unit(PSU) banks no longer have a statistically significant non-performing asset (NPA) problem. This even as a lot of it was attached to bottle-necked infrastructure loans, now largely untangling via fresh permissions and funding.

Both PSU banks and private ones have already slashed lending rates by 0.9%. This without waiting for the expected 50 bps repo rate cuts from the Reserve Bank of India (RBI), which should lower them further still.

Conversely, deposit rates will also be cut. This may force risk-averse fixed deposit investors to seek other, better yielding avenues. Will this hurt bank liquidity? It remains to be seen.

To cushion the blow, the Government has fixed an 8% yield for senior citizens. It is also holding the deposit rates steady for small savings schemes at post offices.  

The ongoing cash shortage due to slow remonetisation is also acting as a brake on inflation. It is doing so more effectively than the high-interest rate regimes of the past, which only choked off credit.

The Modi Government plans to permanently reduce cash in circulation to hamper the revival of the parallel economy. This too will force mainstreaming of many erstwhile cash businesses.  

With the momentous roll-out of online general sales tax (GST) country-wide, more business/industry will be inescapably conducted through official channels.

This integration will yield much more indirect tax in value terms, though it accounts for two-thirds of the total anyway.

Direct taxes from individuals and corporates yield the remaining third, but there is potential for a quantum jump if a universal bank transaction tax comes about instead.

The ‘Make in India’ lobbyists, said to be mainly from the US, are pressing the Modi Government to lower corporate taxes at one fell swoop to a 15-18% band. However this is a far cry from the 30% plus prevailing at present.

The Government could be tempted, because it would  encourage massive foreign direct investment (FDI) into defence manufacturing and create lakhs of skilled jobs.

FDI is already at an all-time high, attracting more than China, but still far from massive.

There is also a persistent demand, that failing its abolition, individual income taxes should be reduced. This would both encourage compliance and increase the tax base, especially now that many more people find their money dragged into the bank.

If there is ‘unaccounted money’ in the calabash, an estimated three lakh crore, nestling amongst the kosher deposits, it is obviously determined to make a valiant effort at explanation.  

None of it has been extinguished. This implies that large tranches of black money are simply not kept in cash. Ergo the amounts that have been put in the bank can be explained.

More so, if this freshly laundered money is broken up into little bits and many heads. The tax man, all too few in number, given the size of this task, has his work cut out for him.

Besides, quite a lot has round-robinned straight back into cash, but in the compact new Rs. 2,000 notes, courtesy the back doors and after-hours.

There is anger with regard to the nearly 2,000 political parties that can deposit all their cash and claim it is from anonymous donors paying in Rs. 20,000 or less. But Modi seems sincere about his avowals to reform political funding next.

Right now, the Government is basking in the glow of public approval despite the discomforts of ‘notebandi’ visited on many. It is therefore keen on a political dividend in the forthcoming assembly elections after sweeping municipalities around the country.

Accordingly, it has refrained from more disruption by going after gold stashes and benami property till further notice.

For: ABP Live

(750 words)

January 5^th, 2017

Gautam Mukherjee