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

India set to bolster ties with Brazil during Bolsonaro`s visit

As India gears up to celebrate its 71st Republic Day on January 26, it will host Brazilian president Jair Bolsonaro as the chief guest of the event that marks the day when the country formally adopted the Constitution as the guiding document. This will be Bolsonaro’s maiden visit, which he would like

India gears up to meet Coronavirus challenge

With the outbreak of Coronavirus reported from China, India has started taking precautionary measures, and begun screening passengers of selected flights. “As of 21st January, a total of 43 flights and 9156 passengers have been screened for novel Coronavirus illness. Till now, no case

Reit: Real estate for retail

Every middle-class Indian dreams of a home coupled withlanded property to live off the rent. However, large initial investment, particularly inmetros, and low yields ensure that real estate is out of the reach of the common man. A return of 7-8 percent from commercial properties is considered highly commen

Maharashtra poll panel rolls out Electors Verification Programme

The Maharashtra State Election Commission has urged the residents to take advantage of the ongoing Electors Verification Programme (EVP) and register their names along with those of the members of their families in the electoral rolls. The drive, which started on November 11, 2019, will continue till Febru

Budget goes to print with Halwa ceremony

The budget season is here, and the annual document has gone to print, beginning the lock-in period till its presentation in parliament on February 1. The Halwa ceremony, marking the commencement of the budget printing process, was held in North Block Monday morning in the presence of finance

‘Desh Apnayen’ is a movement to partner with your country: Vallabh Bhansali

Investment banker, venture capitalist and stock-market expert Vallabh Bhansali is the co-founder and chairman of Enam Group, a pioneering equity research company in the country. He is a promoter of spiritual and cultural traditions and also an expert on development economics, behavioural science and co



Archives

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter