Why 2017 is a challenging year for the Indian economy?
On 8th November 2016, Indian were met were with shocking news from the directive of their newly elected prime minister Narendra Modi that all denomination notes of 500 and 1000 rupees will no longer be in use. It was a major political statement considering the government had all along been planning to make the deliberate move and processing the new notes while keeping the secret on the ongoing process all along. The new twist widely adopted the name ‘demonization”. Whether this move will prove worth or worsen the current scenario, it is worth a debate, but one thing is clear, Modi has with steadfast being able to deliberate his campaign promises; promising to reduce tax evasion from wealthy people and instead used it in developing India’s infrastructure. It is purported that Indian’s have the culture of making transaction using liquid cash. As a matter of fact, about 50% of all transaction made by the people of India are transacted outside the bank and alter stashed in safes among very many rich Indians.
The idea of Modi is to retrieve this lot of cash from where it had been hidden and bring it into books and thereby making it possible to analyses whether the money had being paid it tax in full else recover the tax. Arguably, the 100 rupee values only 12 pounds, much less compared to countries matching their economic standards. The tradition of retaining their money back in drawer shelves was dragging back the growth of India’s infrastructure. Only 17% tax to GDP ratio was annually collected compared to 34% collected averagely by other economies of the Organization for Economic Co-operation and Development consisting of mostly rich nations. Although this initiative was swift and unexpected at the time, it is yet a welcome as evidenced by long queue of people in all banks coming to change their notes currently exchanging at 4500 (48 pounds) of the old rupees in cash for 500 (6 pounds) and 2000 (24 pounds) rupees notes.
The move will definitely prove an important step in recovering lot of tax in India which has been recording power tax return rate as low as 1% of eligible tax payers. The tax authorities have been instructed to investigate and deposited that goes in excess of 250000 rupees (2,962 pounds) for tax compliance and in the otherwise case penalize a fine of 200% to any tax owed. The penalty has particularly augured well with the majority poor who had elected Modi, who though are also affected with the new development are happy that the much collected from rich people will greatly impact the economy of India positively and thereby end their temporal hardship. More so, rich individual have used black money to evade paying taxes from the much they reaped in their economy and therefore prudent to draw them in the formal economy by getting them pay the taxes they owed. While this now seems as news of hope among the people of India, a few speculate that the introduction of the 2000 rupee note could act another dangerous avenue for black money transactions.