BRICS Bank Chief Says Demonetisation Will Fetch Rs 2.5 Lakh Crore To The Government

BRICS bank chief and former ICICI Managing Director, KV Kamath has come out in support of Prime Minister’s decision to withdraw Specified Bank Notes. The move will help the economy as tax compliance will improve, the interest rates will come down, government will reap windfall by way of taxes through its latest Income Declaration scheme (IDS) and there will be recapitalisation of banks suffering from bad loans problem.

Interest rates Will Fall

Kamath says that interest rates will fall by as much as 100 basis points over a six-month period. "There will be an impact on interest rate and inflation. Ultimately that is what drives the economy," The Economic Times quoted him saying.

2.5 Lakh Windfall For The Government

Kamath says that the government will reap the windfall of about Rs 2.5 lakh crore. The figure is similar to the one put out by the State Bank Of India in its report. However, the difference is while the SBI thinks that this much money will not return to the banks, Kamath believes, though the money will return the government will get the money in the form of taxes thanks to the latest IDS. He told ET that ‘many would be inclined to deposit cash because of the recent amnesty scheme under which those holding undisclosed cash would have to pay 50 per cent tax. As much as Rs 2.5 lakh crore might come into government coffers by way of taxes.’

How will recapitalisation of banks happen?

Kamath says that lower rates would ‘lead to gains in banks’ bond portfolios running into lakhs of crores of rupees.’ In an interview to the ET, Kamath explained, “ There was 1 lakh crore profit that happened in the last quarter with treasuries moving down by around 70 basis points. We are talking of a number that I have not seen before in my career. That should once and for all put an end to the question of where will the capital required to recapitalise banks come from. The answer — it comes from within due to this salutary impact in the system. Going forward, profits due to treasury gains could be as much as Rs 1.5 lakh crore.”

Denouncing the often-cited criticism of the lack of preparedness, Kamath said that the move needed to be kept secret which meant only a few people could know. Making elaborate preparation would’ve compromised the move.