India’s decision to scrap some high-value notes will significantly disrupt economic activity , result in weaker consumption and economic growth in the immediate term but is expected to boost tax revenues and trigger faster fiscal consolidation in the long run, global ratings agency Moody’s said.
“Corporates will see economic activity decline, with lower sales volumes and cash flows.Those directly exposed to retail sales will be most affected,“ Laura Acres, a managing director in Moody’s Corporate Finance Group said in a new report on demonetisation.
In a separate analysis, the Centre for Monitoring Indian Economy (CMIE) estimated the transaction cost of demonetisation at Rs 1.28 lakh crore.
“All estimates are limited to the 50-day window. However, the impact of low liquidity , broken supply chains and loss of confidence in consumers is likely to impact the economy over a longer period. Therefore, the transaction cost of this exercise is more than the Rs 1.28 lakh crore estimated here, which is limited to the 50-day window till December 30,“ Mahesh Vyas, Managing Director of CMIE, said in a report.
Moody’s said households and businesses will experience liquidity shortages as cash is taken out of the system, with a daily limit on the amo unt in old notes that can be exchanged into new notes. (The government stopped the exchange from November 25).
In addition, there will be a loss of wealth for individuals and corporates with unreported income, as some will choose not to deposit funds back into the formal financial system to avoid disclosing sources of these funds, the agency said.
The agency said the move would improve the overall operating environment for doing business in India -by improving the ease and speed at which payments reach manufacturers and reducing corruption -but would prolong the economic disruption.
“However, greater formalization of economic and financial activity would ultimately help broaden the tax base and ex Impact will be over by end of fiscal: pand usage of the financial system, which would be credit positive,“ Moody’s said.
Consumption in India is largely cash-driven, and a move towards digital payments would require a gradual change in consumer habits, it added.
“Banks would benefit significantly from a move towards digital payments, given their role as intermediaries for such transactions. In addition, rising bank deposits -which Moody’s expects to increase by 1-2% -could lower lending rates, a positive for banks.“
Source: Times of India
