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Finance Minister Arun Jaitley today said demonetisation may impact growth "for a quarter or so" but this disruption will not last too long and the move along with GST will help create a larger and cleaner economy.
"I have least doubt in my mind that (one year from now) you will have a bigger economy, higher GDP, cleaner GDP. You will have a higher tax base and more money in banks, and probably interest rates will be more reasonable. Therefore, all these collectively could contribute a lot as far as GDP is concerned," he said at the HT Leadership Summit.
Both the economy and social system will see a major transformation after the implementation of the Goods and Services Tax (GST) post demonetisation.
"I personally believe that once the remonetisation process is complete and the GST is implemented, it's going to hugely impact India's businesses and also the Indian way of life.
"You will have more of digitised expenditures, you will have a taxation system far more efficient, which is extremely difficult to evade, where each limb of the transaction is being captured," he said.
As far as the negative impact of demonetisation is concerned, Jaitley said, "When you switch over, it creates disruption. I don't see disruption lasting too long. You may see the impact for a quarter or so. Then when you look at next 12-15 quarters, it's certainly going to benefit."
Citing a few economic trends post demonetisation, the Minister said rabi sowing this season has been higher than last year, while auto sales were a mixed bag.
"Of course, you will have some disruption created because of the switchover, in the long run, advantages are going to be huge as far as the relative cost of disruption is concerned," Jaitley said.
Speaking about the various advantages of the demonetisation, the Finance Minister said, it could lead to reduction in interest rates.
"Rates will now hopefully at some stage come down. With more money in the taxation system, our base itself increases," he said.
As far as inflow from demonetisation is concerned, he said it would come from many sources including higher tax penalty to be levied on unaccounted money.
Jaitley further said that low-cost deposit due to
demonetisation will increase and therefore the ability of banks to use that money suddenly improves for reasonable cost lending in various sectors like social, infrastructure, industry and trade.
"So, that boosts the economy. There could be another limb, that money which was not deposited, then goes to the credit of the RBI. And that money can be constructively used. And of course the third limb, the immediate advantage that you will have of these money, that are even being deposited and which are liable for exemplary taxation," he said.
And the fourth limb, he said, base of taxation for direct and indirect would expand.
Noting that security printing of currency is a fairly complicated and time-consuming exercise, the Finance Minister said, replacement of large volumes of currency required calibrated move by the RBI otherwise it would lead to malpractices.
"If you suddenly release entire thing in one go then there would be market malpractices and therefore remonetisation process is not instantaneous but it would be spread over a couple of weeks," he said.
Acknowledging that long queues were factored in during the decision-making process of demonetisation, the Finance Minister appreciated that people have cooperated immensely and those standing in queues were disciplined.
"The country by and large has welcomed this decision," he said, adding there will be a very significant amount of currency that will be released into the market by December 30.
"One of the significant advantages of this would be you won't have the same level of currency which existed on November 8...The level of paper currency will shrink, you should not expect the same level of paper currency coming back and it would be lesser. The balance would be replaced by other modes credit, debit cards, e-wallets," the FM said.
Emphasising that people are already moving towards digital transactions, he said out of 80 crore credit and debit cards, 45 crore cards are in active circulation.
Besides, there are 23 crore e-wallets that started less than one-and-a-half years ago, he added.
"Both in politics and media, you find difficult to digest these figures but the country is changing much faster than what we think," Jaitley said.