In an aggressive move, Prime Minister Narendra Modi announced his decision on late Tuesday night to crack down on unaccounted wealth that accounts for one-fifth of the Indian economy. Modi banned 500 and 1,000 rupee notes and pulled them from circulation to reset cash flow. It rattled India’s realtors and retailers. It also left ordinary consumers, tourists and other visitors from around the world in real trouble.
But there’s a potential gain for Modi and his government. Economists and analysts are scrambling to calculate the numbers tied to the shock move. Here’s what we know:
*Modi’s fight against tax evasion and graft can add $45 billion to India’s budget. It appears that Modi will be able to cut by half his projected 5.3 trillion rupee budget deficit for the year through March 2017. India has Asia’s widest fiscal deficit.
*All deposits of more than 250,000 rupees between November 10 and December 30 will be flagged to India’s income tax office, which will match details with declared income. Any discrepancy will be treated as tax evasion and tax amount plus a penalty of 200 percent of tax payable will be levied.
*The move will suck out about 86 percent of the 17.8 trillion rupees of currency in circulation.
*Analysts say as much as a third of this will prove to be illegal and be unclaimed. Those funds can then be used by the government to narrow the fiscal deficit.
*Less cash in the hands of consumers could also drive down prices of key goods, helping control one of Asia’s fastest inflation rates.
*The move is designed to improve his popularity rating and put constraints on election funding, which will benefit him in crucial state elections next year. Black money is often used to fund political campaigns, particularly by smaller, regional parties that entice voters with cash. Analysts say Modi’s move will position his party ahead of rivals who will face significant shortfalls next year.
*Having won the 2014 election in a landslide on the promise of tackling corruption and improving the ease of doing business, Modi’s star had started to fade as he faced criticism that he only implemented incremental reforms. That election was dubbed the most expensive in Indian history with the government, political parties and candidates spending 300 billion rupees, according to estimates from the New Delhi-based Centre for Media Studies.
*India’s real estate sales will take a big hit as the sector accounts for a large share of illicit deals, with an estimated 10 to 15 percent of transactions done with black money.
*Property prices could fall 10 percent to 20 percent while the impact on land prices will be bigger. Land prices may drop as much as 40 percent while luxury home sales will drop and prices will stagnate for the next two years.