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

Reality As It Is: The Buddha`s advice on overcoming bias, prejudices

‘See Things As They Are’: Life Lessons from the Buddha Edited by Nanditha Krishna Aleph, 98 pages, Rs 399 There is a wonderful idea behin

World growth expected to face inflation pressures

World GDP forecasts for 2023 have been revised down again as central banks intensify their fight against inflation and the outlook for China’s property market deteriorates, says Fitch Ratings in its latest Global Economic Outlook (GEO) report. Fitch now expects world GDP to grow by 1.4

200+ bird species documented in Chhattisgarh’s first-ever survey

Nine species of owls (including the magnificent spot-bellied eagle-owl), 10 birds of prey, 11 species of Woodpeckers (including white-bellied woodpecker – the largest woodpecker in peninsular India), and many other species have been documented during a first-ever bird survey in Chhattisgarh.

Cyclists plan ‘memorial ride’ to press demand for infrastructure

Cycling is a passion for many, and it is a way to fitness too. With rising numbers of vehicles on the road, the government encourages this environment-friendly mode of transportation, but it comes with numerous challenges. An accident last month on the Mahipalpur flyover of south Delhi, which took the life

“World headed towards stagflation; India must take care of the poor”

As the post-pandemic fallout and geopolitical uncertainty slows down global economies and sanctions against some nations, energy crisis and inflation are adding to the troubles, India is projected to be decoupled from world economy and fare better. To check if this belief really holds water, in the latest

The changing nature of CSR in India

With the advent of globalization came a new set of challenges for corporations, notably the duty of ensuring the well-being of all stakeholders while also protecting the planet`s natural environment. Although we are dedicated to a faster and more inclusive rate of growth, it is equally imperative that we f

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter