The problem, however, will be to find good borrowers. None of the banks want to get into situations where non-performing assets (NPAs) swell. Hence caution will see the money being lent out only to parties that had already enjoyed decent access to funds. Medium and small scale enterprises might not get the benefit of such funds. Ditto for small self-employed individuals who trade in commodities (they sell items like bread, eggs and the like and garner cash on a day-to-day-basis).
This will mean two things. The shrinkage of funds in the markets will make things difficult for small traders, and even drive them out of business. They can survive only if customers have cash. But with large amounts of cash (approximately Rs 3 lakh crore) not being returned to banks, and hence being rendered useless, money supply is bound to shrink. This money is used to lubricate the businesses of hotels, bars, taxi drivers and petty workers.
Expect the people employed in these sectors to be out of job for some time.
That could reduce purchasing power, causing the total amount of goods (and services) sold to shrink. That reduced consumption will mean less service tax and excise duty collections for the central exchequer. If tax receipts begin to shrink, expect the finance ministry to become more hawkish on tax collections. Hence tax cuts may not come in that easily.
