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India’s GDP Set To Surge

International | Nov 14 2016

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A surprise clampdown on the black market economy is the latest in a string of measures Jaipur Asset Management believes will add whole percentage points to India’s GDP growth.

– Government initiative shocks India
– Enormous black market economy attacked
– Growth ramifications profound

 

By Greg Peel

When those in the know became aware the Indian government was preparing to introduce a 2000 rupee banknote to usurp the 1000 rupee as the highest denomination in India, the immediate thought was all this would do is further fuel the country’s extensive black economy. It is estimated there is some 14 trillion rupee in cash hoarded in India.

What was not known was that the introduction was actually all part of a cunning plan, meticulously prepared for, and pre-empted by a series of financial system changes implemented over the past couple of years. On November 8, when all the world’s attention was drawn to the US election, the Indian government announced the R2000 note would actually replace the R1000 note. Indians would be given a short time to respond.

In simple terms, Indians hoarding cash in R1000 notes will need to deposit them into a bank or they will become worthless. The extent of the cash economy in India comes down to two elements – the black market, featuring Greek-style tax avoidance, corruption and terrorism funding, and the poor regional areas where banking facilities simply do not exist.

In order to address the second element, the Modi government first issued one million ID cards to the public and over two years introduced a simple zero balance bank account. The result was 250m bank accounts being opened for the first time, 200m debit cards being issued, and banking infrastructure being established in even the remotest of regions.

To address the first element, the government first introduced the Black Money Act 2015, which ensured stringent penalties, including jail terms. The Income Declaration Scheme of 2016 allowed Indians a period in which to come clean about their cash holdings, or face the consequences.

The foundation was laid, and then came the surprise move, which not even those who thought they were in the know knew about. The move is not only going to cause upheaval among the criminal class, it will potentially rankle Indians at all levels, including some in Modi’s party. The prime minister again has made it clear, suggests Neelesh Mehta of Australian-based India investment firm Jaipur Asset Management, that he is not shying away nor will not shy away from difficult political decisions as he continues his process of reforms to the very structure of and form of the Indian economy.

The impact, says Mehta, is and will be profound.

The whole cash economy will be forced into the mainstream. It is estimated household financial savings will increase fivefold over the next ten years. Applying the velocity of money and the ability to use these funds, alongside GST reforms introduced in August, India’s GDP is likely to grow by “percentage points”, Mehta suggests.

A large portion will likely find its way into equities. Given property transactions typically involved large portions of cash, property prices are expected to initially fall 20%. But cleaning up of the industry will mean foreign investors, previously deterred by the cash economy, will be encouraged.

Counterfeiting and terrorism funding is expected to be severely hit. No one is complaining about that. While the move has caused some confusion, word on the street, Mehta relates, is supportive. Jaipur Asset Management would be surprised if Narendra Modi is not re-elected, but either way has set in motion changes that impact for many, many years.

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