Demonetisation Effect: Money Supply Growth May Decline By 3 Per Cent

Mumbai: The average growth of money supply in the economy may slip to 9 per cent from 12 per cent in the near term, if 25-30 per cent of unaccounted currency does not flow back into the banking system post demonetisation move, Dun & Bradstreet said in a report.

On the "basis of the result of the demonetisation that took place in 1978; if 25-30 per cent of unaccounted /undeclared money does not come back in the system that is Rs 3.5 trillion to Rs 4.3 trillion, it will impact growth in money supply by about 3 per cent," the report said.

"Considering the average growth of money supply for last three years which is around 12 per cent, growth in money supply might moderate to an estimated 9 per cent in near term," it added.

However, it noted that in the case the RBI decides to print the entire 86 per cent of the high denomination notes, money supply will pick up with the new notes being gradually circulated over a period of time.

On the evening of November 8, the government announced that Rs 500 and Rs 1,000 notes would no longer be legal tender, as part of its move to eradicate black money.

As per D&B, while demonetisation would cause short term pain across the board, it is largely anticipated to have far reaching impact on the Indian economy in the mid to long term. "In sync with the Digital India initiative, these measures would accelerate the move towards a cashless economy. Along with GST, this measure would improve tax compliance and fiscal balance of the government," the report said.

Noting that the move sends out a positive signal to global investors, D&B said it may help India climb the rank of various indices published by international agencies such as the corruption perceptions index.

The efforts taken by the government to eradicate black money over the past two and a half years include formation of a special investigation team, law passed in 2015 on disclosure of foreign bank accounts, levy of strict rules to curtail benami transactions in 2016, and scheme to declare black money in 2016.

These efforts have resulted in more than Rs 1.25 trillion of black money being unearthed, the report said.

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