Prime Minister Narendra Modi’s decision to outlaw high-denomination banknotes will boost revenue collections, help India increase spending on welfare projects and cut taxes, a minister said.
Deposits have outstripped loan growth at Indian banks after people started turning in 500 ($7.35) and 1,000 rupee notes that are no longer legal tender following Modi’s Nov. 8 decision to ban high-value currency notes, effectively canceling 86 percent of cash in circulation. That’s helped them lower lending rates with the biggest state-run bank slashing borrowing costs to a six-year low.
“As more and more money is coming into the formal economy, one can look at more attractive tax rates and lower tax slabs,” Power Minister Piyush Goyal said in an interview on Friday. “Even if half the people who were in the informal sector move in to the formal economy and more taxes get collected, more money can be spent on the welfare.”
Modi’s administration, which is set to announce the budget for the year starting April 1, has already offered interest waivers and cheaper housing loans to the poor last week to shore up popularity after his cash ban hurt farmers, low-income households and businesses. So far support for the move remains strong, as people believe it targets unaccounted wealth, however a deeper economic slowdown could turn voters against the ruling party in key polls over the next two months. Read More…