Demonetisation beneficial for banks but will impact GDP: Moody's
Advertisement
There has been a lot of discussion on the pros and cons of demonetisation since on November 8th. In between all this, rating agency Moody 's has said demonetisation is beneficial for the Indian government and banks but implementation challenges of this "unprecedented move" will disrupt economic activity and weigh on GDP growth for some time.
The move will have credit implications for every sector of the economy as the decline in economic activity will depress corporate sales cash flows, it said.
"Although the measures in the near term will pressure GDP growth and thereby government revenues, in the longer term they should boost tax revenues and translate into higher government capital expenditure and/or faster fiscal consolidation. Any fiscal improvement will be credit positive for India's barely investment grade Baa3 rating," Marie Diron, associate managing director in Moody's Sovereign Group said in a statement.
Moody’s is expecting difficulty in implementation to disrupt economic activities with sectors having a more direct exposure to retail sales or with large exposure to sales in rural areas being impacted the most.
It also said that business and households will face liquidity shortages the scheme will also be a loss of wealth for individuals and companies with unreported income.
The ratings agency warns a more prolonged disruption would dampen GDP growth for a much longer period. Moody's says demonetisation "demonstrates the Indian government's commitment to addressing tax avoidance and corruption", which, if effective, will lift tax revenue collection.
It also said that in over a medium term, the greater formalisation of economic and financial activity will help to broaden the tax base and expand usage of the financial system.
"Demonetisation, together with other revenue-enhancing policy measures, such as the implementation of the Goods and Services Tax (GST), will ultimately contribute to raising the revenue intensity of economic activity," Moody's said.
However, Moody’s expect banks to get the max out of this.
Demonetisation will also stimulate the development of electronic retail payment system. Bank deposits could rise 1-2%, benefiting from a strong impetus to use the formal financial system for the intermediation of commercial transactions, especially in the retail segment.
Advertisement
The move will have credit implications for every sector of the economy as the decline in economic activity will depress corporate sales cash flows, it said.
"Although the measures in the near term will pressure GDP growth and thereby government revenues, in the longer term they should boost tax revenues and translate into higher government capital expenditure and/or faster fiscal consolidation. Any fiscal improvement will be credit positive for India's barely investment grade Baa3 rating," Marie Diron, associate managing director in Moody's Sovereign Group said in a statement.
Moody’s is expecting difficulty in implementation to disrupt economic activities with sectors having a more direct exposure to retail sales or with large exposure to sales in rural areas being impacted the most.
It also said that business and households will face liquidity shortages the scheme will also be a loss of wealth for individuals and companies with unreported income.
Advertisement
It also said that in over a medium term, the greater formalisation of economic and financial activity will help to broaden the tax base and expand usage of the financial system.
"Demonetisation, together with other revenue-enhancing policy measures, such as the implementation of the Goods and Services Tax (GST), will ultimately contribute to raising the revenue intensity of economic activity," Moody's said.
However, Moody’s expect banks to get the max out of this.
Demonetisation will also stimulate the development of electronic retail payment system. Bank deposits could rise 1-2%, benefiting from a strong impetus to use the formal financial system for the intermediation of commercial transactions, especially in the retail segment.
Advertisement
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- A centenarian who starts her day with gentle exercise and loves walks shares 5 longevity tips, including staying single
- 2 states where home prices are falling because there are too many houses and not enough buyers
- "To sit and talk in the box...!" Kohli's message to critics as RCB wrecks GT in IPL Match 45
- 7 Nutritious and flavourful tiffin ideas to pack for school
- India's e-commerce market set to skyrocket as the country's digital economy surges to USD 1 Trillion by 2030
- Top 5 places to visit near Rishikesh
- Indian economy remains in bright spot: Ministry of Finance