Governance Now Visionary Talks Series

People will now use Rs 2,000 notes to store wealth: Fitch

Supply chains have been disrupted and time spent queueing in banks has meant lost hours of productive work

GN Bureau | January 10, 2017


#black money   #money   #Fitch   #currency   #Rs 2000   #demonetisation   #RBI   #cash  
People will now use Rs 2,000 notes to store wealth: Fitch
People will now use Rs 2,000 notes to store wealth: Fitch

There are considerable uncertainties over the potential positive effects of demonetisation, said global ratings agency Fitch. “Most importantly, demonetisation is 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, it said on Tuesday.
 
The demonetisation of large-denomination bank notes has caused short-term disruption in India’s economy and led us to downgrade our growth forecasts for 2017. “The move has some potential benefits, but the positive effects are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects.”
 
The withdrawal of Rs 500 and Rs 1,000 currency notes has left consumers without the cash needed to complete purchases and farmers without the funds to buy seeds and fertiliser for the sowing season. “Supply chains have been disrupted and time spent queuing in banks has meant lost hours of productive work. The impact on the economy will increase the longer the disruption continues, but Fitch has already revised down its GDP growth forecast for the financial year ending 31 March 2017 (FY17) to 6.9% from 7.4%.”
 
It noted that demonetisation could boost government revenue to the extent that it helps to move economic activity from the informal to the formal sector, as more earnings would be declared. It is possible that this positive effect would soon outweigh the drag on revenue collection from lower short-term economic activity. Government finances may also benefit from a proportion of high-denomination notes not being traded. 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.
 
There are similar uncertainties over the impact on the banking sector.
 
Some banks have already reported large increases in deposits since demonetisation began. A surge in low-cost funding might encourage credit growth and support the economy. However, demonetisation could also affect the ability of some borrowers, especially SMEs, to service their loans, with negative effects on bank asset quality. Moreover, 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.
 
The intentions behind demonetisation were positive and in keeping with broader reform efforts, but the short-term pain might outweigh the uncertain long-term gains.
 

Comments

 

Other News

Honouring the Honest: PM launches platform for transparent taxation

Prime minister Narendra Modi on Thursday launched a platform for “Transparent Taxation - Honouring the Honest” through video conferencing. Addressing trade and industry bodies over video conferencing, Modi said the process of structural reforms in the country’s economy has

Few pvt channels give credit to DD: Prasar Bharati CEO

Very few of the 200-plus private news channels gave credit to Doordarshan for the live footage of the historic Bhumi Pujan ceremony at Ayodhya on August 5, says Shashi Shekhar Vempati, CEO, Prasar Bharati. This can impact the revenues but that is not what the public telecaster is aiming at.

Covid-19: More than 3 crore N95 masks distributed

More than 3.04 crore masks of N95 variety and more than 1.28 crore personal protection equipment (PPE) kits have been distributed by the centre to states and union territories (UTs) as part of their joint fight against the Covid-19 pandemic. Since 11th March 2020, more than 10.83 crore HCQ t

Covid-19: Vigorous testing leads to fatality rate drop

India has been registering more new cases of Covid-19 infection than any other country for the past seven days, yet its rigorous push on testing and thus on early identification is bearing fruits, with the case fatality rate (CFR) going further down to 2.1. In a new high, India has scaled th

Election manifestos and voters` Right to Know

Recognising the importance of election manifestos, the supreme court directed the election commission (EC) of India to frame guidelines directly governing the contents of the election manifestos in the case of S. Subramaniam Balaji v. State of Tamil Nadu & Ors. reported in (2013) 9 SCC 659. Although th

No support from govt, says ad veteran Sam Balsara

Advertising veteran Sam Balsara has lamented the lack of support from the government to the industry and said that it has completely ignored the sector. Balsara, the founder, chairman and managing director of Madison World and Madison Communications, said that the government needs to provide

Governance Now 5th PSU IT Forum

Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter