There are very few events etched in the memories of an entire generation. For the Americans, it was the 9/11 attack and the Lehman brothers collapse. For Indians, it was the Kargil skirmish, the 26/11 terror attack and, now, demonetisation.
This bold and moral move by the PM has had its share of execution challenges, the consequences of which are grave. At just about the time when the green shoots, as reported in this column, began to stabilise, the land beneath them was scorched. Real estate, consumer goods, jewellery and the informal business segment of the country have been victims of a frontal attack. Businesses have reported a loss of 30-40 per cent in revenues. The momentum of money has ground to a halt. Banks have run out of money to dispense. Fortunately, the government is course-correcting rapidly. It is ready to launch an extension of the ´Voluntary Disclosure Income Scheme´, where a tax of 50 per cent would give unaccounted money a holy dip with another 25 per cent of the money being subject to a zero interest bearing bond for four years, thus allowing the offender to circulate 25 per cent of his declaration in an official form. This would effectively cost the declarer 57 per cent. The challenge is that there are several ´start-up gangs´ that have reinvented the art of conversion at a lower cost of 25 per cent. So although the money remains tainted, legal tender is received in place of the obsolete notes. This would dampen the response to such conversion.

Unless we are able to increase the number of tax-paying individuals from the current 30 million to at least 45 million, the effectiveness of the demonetisation exercise may remain in question. The country, however, has improved its image by portraying a robust financial system that has been able to withstand such staggering logistics.

That said, real estate has suffered a big blow. According to a report by PropEquity, housing prices in 42 major cities across India could drop by up to 30 per cent over six to twelve months, wiping out over Rs 8 lakh crore worth of market value of residential properties sold and unsold by developers since 2008. The bigger casualty is employment, which is likely to suffer a setback.

This may be one of the stiffest challenges that the Modi Government will face. Our CW issue with Minister for Skill Development and Entrepreneurship Rajiv Pratap Rudy has already highlighted the fact that improvement in skills for 35 million workers was a prerequisite for desired growth. However, demonetisation has severely hit the informal sector, which will need to undertake some costs to come into the formal economy. Targeting benefits to reach the right segments would require precision and agility on the part of the government.

On the brighter side, interest rates are set to come down. Income tax rates, too, will ease up
The cycle of low rents and high interest is likely to turn with interest rates softening up and rents hardening. Public spending will continue to drive economic sentiment. Private-sector spending will defer all plans but overseas investments with a stronger dollar may rise if the Fed rates remain easy. But there is a fear that the Federal Reserve may increase the rates and just as $3.18 billion fled the country in November alone (the steepest selling in equity and bonds by foreign institutions in the past three years), such a trigger may depress our outlook.
As the government brings in more money to be accounted for in a formalised manner by curbing black money, it needs to set benchmarks for the use of this money, especially the money managed and run by it. Only 15 of the 74 loss-making PSUs have been asked to shut shop so far. With more and more digital mechanisms in place in the government, it needs to relook at its hiring policies and shed some weight by moving experienced bureaucrats into management positions of SPVs, which are JVs under the PPP mode.

The fight against black money will also need to provide a balm for those wounded as part of collateral damage, to keep up the spirit of the population that is supporting this moral battle.
We need a ´white´ knight!