The black money economy is estimated to be ₹30 lakh crore, a small 4-8 per cent of which is in cash. Eighty five per cent of the total cash (by value) has been rendered useless, of which half is estimated to be black money. With most Indians living on less than $2 a day, hoarders of large denomination notes aren’t the poor or the lower middle class but businessmen, politicians and professionals such as lawyers and chartered accountants.

India is estimated to have 2.5 lakh dollar millionaires. Hence the rich represent the top 1 per cent of India, assuming these numbers are under-reported by a factor of 10 and one millionaire per family unit. Demonetisation is, therefore, aimed at the top 1 per cent and against $110 billion in cash. This is expected to have long-term ramifications.

GST : The parallel economy, which is based on black money, has been hit by demonetisation. However, this cash economy may proliferate again within 6-9 months especially since Indians are culturally attuned to cash transactions. The planned GST implementation and restrictions on black money are expected to increase tax compliance, as many will be forced to transact through formal banking channels.

Real Estate : The industry is already suffering due to unsold inventory, stressed assets and project delays. Demonetisation is expected to exacerbate the current situation in the secondary market. We believe the primary market will also be deeply affected since investments in this market are correlated with liquidity in the secondary market.

Cashless economy : The current move is expected to bring India closer to a cashless economy which may grow at a rate of more than 100 per cent post-demonetisation, along with deeper penetration of debit and credit cards. This may soon turn out to be a habit-forming event for the country.

Growing the tax base: There is a substantial resolve against black money as is evident from steps such as the Income Declaration Scheme, amendments to the tax treaties, the new Benami Transactions Act, etc.

These steps also empower the government with huge volumes of data, which can now be used to track down money launderers. Demonetisation will also nudge Indians towards formal banking and online transactions which will mean efficient tax reporting and filing.

Counterfeit currency and terrorism: As counterfeit currency ceases to be legal tender, it is expected to hugely impact the financing of anti-national activities. The first signs are already visible, as evidenced by the relative calm in Kashmir and Maoist insurgency areas. The new denomination security features have been designed to make counterfeiting harder.

Banking: Demonetisation is expected to bring substantial liquidity to the banking sector which has been facing difficulty on account of extensive stressed assets (over ₹9 lakh crore).

This will increase the banks’ ability to expand credit.

Elections: It is believed that political parties spend 8-15 times more than the officially stated amount during elections. The difference is primarily explained by black money.

It would be interesting to see the impact of demonetisation on the upcoming elections in UP, Punjab and the other States. Elections in India and their funding may witness major changes.

It would be wise to expect short to medium-term discomfort, especially as structural and fundamental changes will happen in a relatively short period of time.

One must not look at demonetisation in a vacuum as the real value of this move will come in combination with better policing, tax reforms, access to formal banking, transparency and progressive monetary laws and actions.

Some of these have already taken place in the form of the Black Money Act, the GST Act, Jan Dhan Yojna, Information Exchange Agreements and the Income Disclosure Scheme 2016.

However, many critical steps are still awaited to combat the current menace of black money.

The writer is Partner, Risk & Advisory, BMR Advisors. With inputs from Abhishek Bali, Sr VP, Risk & Advisory, BMR Advisors

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