Benefits Of Demonetisation Unlikely To Be Strong Or Long Lasting: Fitch Ratings
The benefits of demonetisation may not be as significant as anticipated according to a newsletter put out by Fitch Ratings. The positive effects of demonetisation are “unlikely to be strong or last long enough to help government finances or medium term growth prospects”, Fitch said in its bi-monthly newsletter on India.
The ratings agency said people in the informal economy will still find new means of storing their wealth, especially since demonetisation is still seen as a one-off event.
People that operate in the informal sector will still be able to use the new high denomination bills and other options (like gold) to store their wealth. There are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual.Fitch Ratings' Bi-monthly Newsletter
The Worst Affected
Farmers are bearing the brunt of the cash crunch, according to Fitch Ratings, which says the purchase of seeds and fertilisers for the sowing season has been adversely affected due to the paucity of cash. Supply chains have been disrupted and productivity has fallen as people spend more time queuing outside banks, the report noted.
Small and medium enterprises are also finding it difficult to service their loans, due to the cash crunch which would affect the banks' asset quality, said Fitch Ratings.
The Benefits
While the short term impact of demonetisation led Fitch to cut India's growth forecast for FY17 to 6.9 percent from 7.4 percent, it still sees some upside in the government's disruptive exercise.
Fitch expects demonetisation to boost government revenue to the extent that it aids the shift of economic activity to the formal sector from the informal sector, as more corporate and individual earnings are declared.
It is possible that this positive effect would soon outweigh the drag on revenue collection from lower short-term economic activity.Fitch Ratings' Bi-monthly Newsletter
Moreover, the report also sees government finances benefiting from the proportion of high-denomination notes not being circulated.
This potentially significant amount would be subtracted from the Reserve Bank of India's (RBI) liabilities, and the authorities would have the option to transfer this windfall to the government.Fitch Ratings' Bi-monthly Newsletter
Wait And Watch
Banks across the country have seen a surge in deposits since demonetisation. This liquidity flush might encourage credit growth and support the economy, the report stated. However it also depends on the amount withdrawn after the restrictions are removed.
...the positive impact on funding conditions will depend on deposits remaining in banks beyond the next few months. There is nothing to prevent them being withdrawn again.Fitch Ratings' Bi-monthly Newsletter
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