Demonetisation, GST will act as disincentive to generating black money, says Adi Godrej
Dated 3rd December, 2016
Adi Godrej, chairman, Godrej Group, with diversified interests in FMCGs, real estate, personal care and retail, feels demonetisation will be good for the country in the medium to long term. This, coupled with the Goods and Services Tax will tremendously cut down black money generation.
What has been the impact of demonetisation on businesses?
Generally, I welcome demonetisation for several reasons. In the medium to long term, it will be good for the country. It will have a significant effect on cutting down black money. Even though black money may be kept in other forms, there is a significant amount getting out of circulation. There will be a considerable disincentive to generate further black money. Also, once the GST comes in on April 1, 2017, the generation of black money should come down tremendously since there is no scope for evading indirect taxes. Even direct tax evasion is largely because of indirect tax evasion. This measure will have a cumulative effect, and overall, corruption and black money should come down. Secondly, the fake currency coming from neighbouring countries to finance terrorism will come down. New notes will be difficult to copy since these have more security features. Thirdly, there will be a significant effect on the Naxalite movement because they are financed with a lot of cash.
What about the short term?
In the short term, there are problems because I don’t think the government has properly estimated how much business is transacted in cash — it may not be black money, but it is cash. They have tried to find solutions for individual consumers, but I don’t think they have paid sufficient attention to the amount of business, specially in rural areas, which is transacted in cash. It has affected FMCG and consumer durables also, because people are postponing purchases. So it is very important that cash availability is quickly brought to normal. Normal doesn’t mean the entire amount that has been frozen. That is not required. As of now, there is shortage. ATMs have also not been working properly, that has been a problem. Once that is satisfied, the economy will be back to normal. If cash is not replenished, it will have medium to long term affect on GDP. The availability of cash is better today than three weeks ago. It has improved, but needs to improve faster.
On the real estate sector, since many transactions in secondary market are done partly in black, do you see it getting eliminated and will that bring down prices of real estate?
No, I don’t think the price of real estate will come down, because the input costs are not coming down, land price and other input costs are not coming down. Currently, like consumer durable, people are avoiding real estate transactions and preserving their resources for other things. Once normalcy is restored, real estate will be back to normal. Large listed real estate companies don’t deal in cash, it is mostly the smaller ones and the secondary sale and one of the reason that happens is because the stamp duty in India is very high. In my view the stamp duty should be eliminated, it should be absorbed within the GST regime and then black money in real estate will also come down. I don’t see a price correction because of the current development. Every time something happens in real estate, people talk of price correction. How can the price correct when the cost is so high. If there are very large profit for some companies, the prices can come down.
In the last 21 days, RBI said about Rs 8.4 lakh crore has been deposited. If the entire money gets deposited, do you think the decision will have a huge impact?
I don’t expect the entire amount to get deposited and there will be considerable additional tax collection also. The government will do well, its revenues will rise. I think they should sensibly use that in the Budget once they know about it after December 31. Maybe, direct tax rates can be brought down so that there is better compliance of tax payment and as I said, the stamp duty can be eliminated.
The informal sector contributes 40 per cent to GDP. Will demonetisation lead to permanent demand destruction?
I don’t think that will happen. I think cash will come back in the economy. People won’t get affected permanently. Very clearly, people whose business model was to evade tax even with GST coming in, either they may go out of business or will become law abiding businesses. So one of the two will happen. And it won’t affect the overall economic activity. If some were to go out of business, then others who are law abiding will take over. By and large, they all will learn to pay taxes and that is why I think the tax rates should be reduced in the Budget because the government can afford to. Even with tax rates reduced, and now evasion of taxes coming down because of GST and other reasons, the government revenues will do well. Lower tax rates will be very good for the future of India.
Could the implementation of such a momentous thing been better?
It had to be kept a secret. I had no inkling the day before and most people didn’t. Now without secrecy, it can’t be a success. So you can’t expect planning and secrecy at the same time. My feeling is that the Rs 2,000 note printing was decided pre-demonetisation. It was a co-incidence that demonetisation came immediately after.
Former PM Manmohan Singh said that the move could impact GDP by 2 percentage points?
It would, if the cash is not sufficient within three weeks or so and it wouldn’t if there is sufficient cash coming. So my feeling is that there will be sufficient cash and it won’t be affected. The GDP growth might still be low this quarter, but we can make it up in the fourth quarter. Because, even if we lose GDP by loss of sales etc, stocks would have come down but stocks can be replenished and that will bring it back to normal. And we’ve seen that, for example, when companies have a strike, their products are in short supply. If the strike is 6 to 8 weeks long, you can recoup. But if it’s a longer strike, then there could be an impact. Except that this time, this impacts all companies. So it’s a similar principle. The worst affected is durables. Durables, you can postpone decisions. Food may be the first thing that people need, followed by things such as soaps. Currently consumer durables sales are half of what is normal. But it can quickly catch up. Lot of consumer durables are bought with cash in India, now it can be bought using credit card. So it can change. No economy in the world is a cashless economy. Moving more to a digital economy is a good move. But we won’t become a cashless economy.
(This article is published in Indian Express on 3 December 2016)