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11
January 2017
Fitch
Ratings has downgraded India's rating to 6.9 per cent for 2016-17 from the
earlier 7.4 per cent due to "uncertainty" over the benefits of
demonetisation. The Total Investment & Insurance
Solutions
"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," Fitch Ratings said in its latest bi-monthly newsletter released on
Tuesday.
"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
Total Investment & Insurance Solutions
"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 March 31 to 6.9 per cent from 7.4 per cent," it said. The Total Investment & Insurance Solutions
The
move has the potential to raise government revenue and encourage bank lending,
but Fitch Ratings believes the positive effects were unlikely to be strong and
sufficiently enduring to support credit profiles, it said. The Total Investment & Insurance Solutions
"The
withdrawal of bank notes has left consumers without the cash needed to complete
purchases and farmers without the funds to buy seeds and fertilizer for the
sowing season. Supply chains have been disrupted and time spent queueing in
banks has meant lost hours of productive work," the newsletter said. The Total Investment & Insurance Solutions
Though
the intentions behind demonetisation were positive and in keeping with broader
reform efforts, the short-term pain may outweigh the uncertain long-term gains,
Fitch said.
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. The Total Investment & Insurance Solutions
Fitch,
however, said there were considerable uncertainties over the potential positive
effects.
"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," it said.
"The
informal sector could soon go back to business as usual," it added.
There
are similar uncertainties over the impact on the banking sector. While 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.
"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 newsletter said.The Total Investment & Insurance Solutions
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