A year after the Indian government scrapped high denomination currency notes, a wide range of indicators suggest the economy is still coming to terms with the move, a leading bank said today.
While the initial scenes of long queues of people exchanging notes disappeared within a month or so, the shock measure left a rather lasting impact on informal economic activities, bank deposits and digital transactions, Singapore-based DBS Bank said.
Impact on economic activity was broad-based and prolonged, but with varying intensities across sectors, the bank's Chief Economist Taimur Baig and Economist Radhika Rao said in a report titled 'India Disruptive Demonetization'.
Cash-dependent service sectors, like transportation, logistics, real estate and retail took a greater hit than the larger/listed entities.
Rural demand was depressed, given its cash-intensive nature, while the switch to digital payment modes helped mitigate the impact on urban demand.
Pain was likely most acute in the informal sector, data for which is unfortunately patchy, it said.
DBS looked at data on two-wheeler sales, demand for public works and credit to small and medium enterprises, saying these were perhaps the best in understanding how the currency swap programme has shaped the economy over the past year.
"We see demonetisation as one of many measures taken in recent years by the authorities to nudge Indians toward formalised economic activities," Baig and Rao said.
An economy where proceeds from activities can be tracked is one where the tax base is bound to expand and malfeasance is harder to hide, they pointed out.
Other measures might not have been as dramatic as demonetisation, but targeted cash subsidies, financial inclusion, e-governance, universal ID, and the latest, registration of businesses under Goods and Services Tax, all aim to bring Indians' income-generating activities out in the open.
But in an economy where 90 per cent of employment and over 50 per cent of Gross Domestic Product (GDP) is derived from informal activities, this is bound to be a highly disruptive process, the report said.
Without adequate social safety net provisions, the inevitable rise in the cost of operating in the formal economy (entailing registration, tax compliance and regulatory obligations), will likely compel many informal businesses to either restructure or perish, the report cautioned.
Looking ahead, DBS viewed note ban as one of the larger pool of measures aimed at enhanced formalisation.
This includes pushing forth the biometric identification scheme, tighter regulatory/legal checks, transparency in tax transactions, monitoring money held overseas, amongst others.
"We are convinced that as more individuals and businesses join the formal sector, it would help broaden the tax base, reduce illicit transactions, and create a more enabling environment for regulated activities," wrote Baig and Rao.
Ultimately, this will provide for worker protection, a bigger revenue base for the government to invest, and a more level playing field among businesses.
But in the near term, a deep consolidation in the informal sector appears inevitable.
This is bound to remain a drag on growth in the coming quarters, they added.
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