The Modi government’s crackdown on black money has “jammed” traditional black money laundering machines in the country, resulting in an increase in preference for cash and a decline in the usage of formal banking channels. This was highlighted in a report titled ‘The unintended consequences of India’s battle with black money’, prepared by Ambit Capital.

The report, however, adds that “this crackdown has also led to an increase in the cost of debt capital in the economy owing to a confluence of certain unique factors. As banks are unwilling to lend to sub-investment grade creditors owing to their own NPA [non-performing asset] troubles, this credit demand has shifted entirely to informal channels of lending. This, in turn, has driven increase in lending rates in the black economy to as high as ~34% p.a. as per our primary data sources (vs ~24% a year ago).”

According to the report, as of today, India’s black economy is equivalent to 20% of the size of India’s GDP. “Given that India’s GDP in CY16 is expected to be US$2.3tn, the size of India’s black economy is about S$460bn, which is larger than the stated GDP of emerging markets like Thailand or Argentina.”

“Even as India is characterised by a high savings rate of 33% of GDP, India has a high cost of debt capital and poor accessibility to capital mainly because more than two-thirds of India’s household savings are held in physical form, which includes real estate and gold,” says the report.

The report is also of the view that given that liquidity in the formal banking system is likely to remain under pressure and the cost of borrowing in the black economy appears to be rising, GDP growth is expected to remain flat at 6.8% in FY17.

Here's the full report

Also read our previous stories on black money: Plug the loopholes and get back black money

India still in the dark on black money