The stock market may be overestimating the impact of demonetisation, says Ridham Desai, managing director of Morgan Stanley India. According to Desai, the impact will be negative in the short run as people scramble to exchange Rs 15 lakh crore ($220 billion) in old currency notes.
The ongoing cash crunch may delay the economic recovery that India had started to see – but as the year end nears “this chaos will seem less relevant”.
The impact is negative in the short run but not as large as is being made out by people. Yes, India is a cash rich economy, but the bulk of it is not black money but transactional cash. All of us transact in cash. That’s the anchoring of people in the country. They like to deal in cash. They don’t want electronic (banking). That is why we have only 40 million debit cards in a country of 1.25 billion.Ridham Desai, Managing Director, Morgan Stanley India
Demonetisation: Long-Term Gain
Desai says the government’s move has provided an impetus away from cash transactions and towards banking and electronic transactions and digital payments, resulting in a long term benefit to India.
What will be interesting to observe, he points out, is where the currency in circulation settles at, six months from now.
It’s not a net 13 percent of GDP that banks are receiving in cash. What we will have to see is in six months from now where does currency in circulation settle. It was 13 percent before demonetisation – now does it settle at 11 percent, 9 percent or 13 percent? That difference is the net increase in banking penetration.Ridham Desai, Managing Director, Morgan Stanley India
‘GST A Bigger Step'
According to Desai, the bigger trigger for the Indian economy and the fight against unaccounted wealth will be the implementation of the Goods and Services Tax (GST). The new indirect tax regime, once it comes into effect, will be 10 times more potent than demonetisation in its ability to reduce unaccounted wealth.
Under GST, if you are a producer of a good and you don’t pay tax, you are saving 25 percent tax (that’s the average rate of tax on an indirect basis). Suppose your margin is 10 percent; this puts you outside the tax rate and you end up saving 3.5 percent in income tax. That’s a big difference. That’s the magnitude of the impact.Ridham Desai, Managing Director, Morgan Stanley India
In the context of GST, he says that the multi-rate structure is the best way to go. It would not have been possible for the government to shift to a single or dual rate structure without significant damage to the economy. He expects that transition to happen only 5-7 years from now.
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