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

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

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.

Read: Demonetisation carried pain, admits Arun Jaitley

Comments

Other News

“Script is the real hero”

Basking in the success of the new web series, ‘Scam 1992: The Harshad Mehta Story ’,on SonyLIV, the OTT platform from Sony stable where the lead actors are new faces, NP Singh, MD and CEO of Sony Pictures Networks, has said that the script is the new hero. He credited the s

India’s active cases below 10% of total cases for three days

India’s trend of steadily decreasing active cases continues unabated. The number of Active Cases has remained below 10% of the total cases for the last three days, suggesting only one in 10 cases is active Covid-19 patient. The active cases comprise merely 9.29% of the total positive c

Cabinet clears bonus for non-gazetted employees

The union cabinet chaired by prime minister Narendra Modi on Wednesday gave its approval to pay productivity linked bonus (PLB) for 2019-20 to 16.97 lakh non-gazetted employees of commercial establishments like Railways, Posts, Defence, EPFO, and ESIC, with a financial implication of Rs.2,791 crore.

Covid-19: Daily new cases fall below 50K

India has leaped across several significant milestones in its fight against Covid-19. The new confirmed cases in the 24 hours to Tuesday morning have fallen below 50,000 (46,790, to be precise) for the first time in nearly three months. The last time the number of new cases was close to this level was on J

Media taking advantage of a divided Bollywood: Shatrughan Sinha

Legendary film star and politician Shatrughan Sinha has said that friendship in Bollywood is limited to onscreen, and there is no unity and some news channels are taking advantage of this situation. “Groups within the industry or their supporters may sometimes come together for some c

‘2.40 lakh TB cases went unreported in India in 2019’

In India, only 2.40 million out of an estimated 2.64 million cases of tuberculosis were reported to the government, that is, 2,40,000 TB patients went unreported, in 2019, according to the WHO Global Tuberculosis Report 2020. The reporting of TB cases, however, has significantly increased ov