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Note ban will have long-term benefits, curb tax evasion: OECD

LiveMint logoLiveMint 28-02-2017 Asit Ranjan Mishra

New Delhi: Demonetisation of high-value currency notes by the Indian government will have long-term benefits and complement other initiatives taken by the government to fight black money and reduce tax evasion, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday.

In its Economic Survey for India released on Tuesday, the body of rich countries said implementing demonetisation will have a transitory impact with short-term costs. “The shift towards a less-cash economy and formalization should, however, improve the financing of the economy and availability of loans and should promote tax compliance,” the survey said.

The International Monetary Fund (IMF) in a report released last week said India’s demonetisation drive may have a larger-than-anticipated negative impact on the economy in the near term through weaker private consumption, but will likely deliver positive benefits in the medium term by curbing tax evasion.

Prime Minister Narendra Modi on 8 November invalidated Rs500 and Rs1,000 currency notes, which made up 86% of the currency in circulation by value, as part of his government’s fight against black money.

Speaking at the launch of the Survey, economic affairs secretary Shaktikanta Das said the process of remonetisation is almost complete and the positive effects of demonetisation will be visible from April.

“The impact of demonetisation was mostly on consumption and that was temporary. Long term and medium term, in the next quarter onwards, the benefits and outcomes are going to be very, very positive,” Das said. “As the process of remonetisation progresses, and it is almost near complete, any adverse effect on consumption during that quarter is not likely to spill over to next year,” he added.

OECD’s Economic Survey has cut its growth forecast for India to 7% from 7.4% earlier due to demonetisation. It, however, forecast growth to pick up to 7.3% in 2017-18 and further to 7.7% in 2018-19.

“GST is going to unleash a huge quantum of growth impulses. The effect will be felt and once India becomes one market, there will be positive impact on growth impulses,” Das said.

The survey said the Indian economy is expanding at a fast pace boosting living standards and reducing poverty nationwide, but further reforms are now necessary to maintain strong growth.

The survey found that the acceleration of structural reforms and the move toward a rule-based macroeconomic policy framework are sustaining the country’s long-standing rapid economic expansion.

“India provides a welcome counter-point to a global economy that has been under-performing for years,” OECD secretary general Angel Gurría said. “Reforms are historic and are bearing fruit, growth is strong and other macroeconomic indicators are improving. Maintaining the reform momentum will be critical to boosting investment and creating quality jobs needed to ensure strong and inclusive growth for future generations, with all segments of society benefitting from it,” he added.

The survey said government should strengthen public bank balance sheets by recapitalizing them, promoting bank consolidation and lowering the 51% threshold below which the government share cannot fall. It also advocated labour reforms enabling reforms in land ownership laws, improving land registry and stepping up the digitization of land records.

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