Benefits of demonetisation are "highly uncertain" and the potential positives are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects, global ratings agency Fitch said today.
Benefits of demonetisation are “highly uncertain” and the potential positives are unlikely to be strong or last long enough to make a significant difference to government finances or medium-term growth prospects, global ratings agency Fitch said today. Taking into account the short-term disruptions, it also revised down the GDP growth estimate for the current fiscal to 6.9 per cent from the earlier 7.4 per cent.
“The note ban 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…benefits of demonetisation are highly uncertain,” the ratings agency said in a note.
“The intentions behind demonetisation are positive and in keeping with the broader reform efforts, but the short-term pains may outweigh the uncertain long-term gains,” it said.
Terming the note ban as a “one-off event” as people will still be able to use the new high denomination bills and other options like gold to store their wealth, it warned that “there are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual.”
It said short-term disruption to the economy has led it to revise down the GDP growth estimate for the current fiscal year to 6.9 per cent from the earlier 7.4 per cent.
The government last week had projected a 7.1 per cent GDP print for the year but excluded the impact of note ban. Most analysts have pegged it steeply down, with some projecting it at a low 6.3 per cent.
The withdrawal of banknotes has left consumers without the cash needed to complete purchases and farmers without the funds to buy seeds and fertiliser for the sowing season, Fitch said.
Supply chains have been disrupted and the time spent queueing up at banks has meant lost hours of productive work, it said, adding the impact on the economy will increase the longer the disruption continues.
The comments come a day after Finance Minister Arun Jaitley dismissed slowdown concerns post demonetisation as “anecdotal” and claimed the rise in both direct and indirect tax collections to buttress his point.
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The agency said government revenues can be boosted to the extent that it helps to move economic activity from the informal to the formal sector as more earnings get declared.
“It is possible that this positive effect would soon outweigh the drag on revenue collection from lower short-term economic activity,” it added.
Commenting on banks, it said there are uncertainties like the ability of small businesses affected by the exercise to service their loans.
The positive impact on funding conditions will depend on the deposits remaining in banks beyond the next few months, it said, underlining that there is nothing to prevent them from being withdrawn again.