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Negative impact of demonetisation on economy transitory: Rating agencies

Negative impact of demonetisation on economy transitory: Rating agenciesBy Venkatachari Jagannathan

Chennai, Nov 1 (IANS) The adverse impact of demonetisation on the Indian economy would be transitory, according to global and domestic credit rating agencies.

However, the current slowdown could partially be attributed to implementation of the Goods and Services Tax (GST) introduced in July, they say.

 

"While the aim of demonetisation to curb the use of black money was in line with the government's broader reform agenda, the cash crunch it caused contributed to significantly lower real GDP (gross domestic product) growth in the March quarter," Thomas Rookmaaker, Director, Sovereigns and Supranationals Group at Fitch Ratings, told IANS.

"This negative impact on growth seems transitory, just like the effect on growth, because of GST implementation in the July quarter," he added.

According to analysts at the rating agencies, economic growth in India would accelerate again in the second half of the year.

"Demonetisation was a major structural change that the Indian economy underwent, which led to disruption on the demand and supply side and thereby the overall economy," Kavita Chacko, Senior Economist, CARE Ratings, told IANS.

Chacko said economic performance, as seen from the quarterly GDP growth, saw a sharp deterioration since the third quarter (October-December) in 2016-17.

"GDP growth (year-on-year) fell from seven per cent in Q3FY17 to 6.1 per cent in Q4FY17 and further declined to 5.7 per cent in Q1FY18, the slowest pace of growth in five years," she said.

This slowdown in the economy could partly be attributed to the disruptions caused by demonetisation. GST implementations too had contributed to the economic weakness, Chacko added.

Asked whether demonetisation has achieved its objective of curbing black money, Rookmaaker answered in the negative.

"The fact that 99 per cent of the bank notes have found their way back to the RBI (Reserve Bank of India) seems to suggest that demonetisation was not very effective in rooting out black money and reducing the informal sector," Rookmaaker said.

"Implementation of the GST may actually be more effective in formalising informal business, as it seems to help draw small firms into the tax net," he added.

According to Rookmaaker, the bounce back is likely to happen in the second half of the year. "It is still uncertain how long the drag on growth from demonetisation and GST implementation will persist. But our baseline scenario is that growth will accelerate again in the second half of the year. This seems to be supported by a sharp and fairly broad-based recovery in industrial production in August," Rookmaaker said.

India's sovereign credit profile would benefit from an improvement in government finances, which currently stand out as a major weakness compared with its peers, Rookmaaker said.

Other rating agencies say that except for two sectors, there would be no long-term impact of demonetisation. "We believe there is no lasting impact in most sectors, barring real estate and the gems and jewellery sector," Abhishek Dangra, Director in the Corporate Ratings Group, Standard & Poor's (S&P) Global Ratings, told IANS.

He said the companies in these two sectors, which traditionally relied significantly on cash transactions, had been forced now to make structural changes owing to policy level changes that limit high value cash transactions.

"Companies in the automobiles and consumer durable sectors have a high -- and an increasing degree of -- financing penetration, muting the impact of demonetisation, despite initial disruption. We expect demand/supply and the commodity price environment to have a greater impact on most sectors," Dangra added.

Saswata Guha, Director, Financial Institutions, at Fitch, said that the increase in liquidity with the banks had not been fully taken advantage of.

"I think the benefit to the banking sector in terms of heightened liquidity post-demonetisation was pretty clear. While funds are gradually finding way into the broader financial system (like asset management, insurance), the impact is still quite benign on banks from a liquidity perspective since credit growth remains pretty weak," Guha told IANS.

(Venkatachari Jagannathan can be contacted at v.jagannathan@ians.in)

(Editors: The above article is part of a series of demonetisation stories leading up to November 8)

(This story has not been edited by Social News XYZ staff and is auto-generated from a syndicated feed.)

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Negative impact of demonetisation on economy transitory: Rating agencies

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