Fitch says demonetization gains may not last

demonetization

Fitch Ratings said the positive effects are unlikely to be strong and sufficiently enduring “to support credit profiles” and will impact GDP growth in the current quarter.

Though the gains will be substantial in the short-term, they may not last as people may still go back to their old ways after a while.

It said the move has the potential to raise government revenue and encourage bank lending.

“India’s sovereign credit profile would benefit from an improvement in government finances, which currently stand out as a major weakness. However, there are considerable uncertainties over the potential positive effects,” it said.

“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. The informal sector could soon go back to business as usual.”

Fitch is not the only analyst house or expert to point out that the government needs to build on the gains it manages from the demonetization move. Many, therefore, have urged the government to put in place strict controls over the use of cash in large transactions after the demonetization move is over.

The withdrawal of bank notes – that account for 86% of the value of currency in circulation – has created a cash crunch, and seems to be holding back economic activity, Fitch said.

“Consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season. Time spent queueing in banks is also likely to have affected general productivity. The impact on GDP growth will increase the longer the disruption continues, but we will already need to revise down our forecasts to reflect what will almost certainly be a weak 4Q16,” it said.

The ultimate aim of the note withdrawal was to curb the use of black money, which is in line with the government’s broader reform agenda. The informal sector is very large in India, accounting for over 20% of GDP and 80% of employment.

“The move could boost government revenue to the extent that demonetisation helps to move economic activity from the informal to the formal sector, as more earnings would be declared. It is possible that this positive effect would soon outweigh the drag on revenue collection from lower short-term GDP growth.

“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.”

There are similar uncertainties over the impact on the banking sector.

“Some banks have already reported large increases in deposits since demonetisation began. A surge in low-cost funding may remove a constraint on banks that prevented lending rates from keeping pace with the RBI’s policy rate cuts in recent years. Reduced lending rates could encourage stronger credit growth, supporting the economy. Lower debt-servicing costs might also speed the resolution of banks’ asset-quality problems.”

However, demonetisation could also affect the ability of borrowers in sectors that rely on cash transactions to service their loans, with negative effects on bank asset quality, which is why the RBI has temporarily allowed banks to give small borrowers more time to repay loans before classifying them as non-performing, the rating agency added.

“Furthermore, 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. Finally, there are other factors holding back lending, most notably the under-capitalisation of state-owned banks and weak investment demand. Fitch today reaffirmed our negative outlook on India’s banking sector – notwithstanding the effects of demonetisation – which reflects the fragile standalone position of state banks and the risks to their viability ratings in the absence of larger capital injections.”


Zero Income Tax up to Rs 4.5 lakh– BUDGET LIVE Finance Minister Arun Jaitley said he is slashing Income Tax paid by individuals by as much as 50% in some slabs.In the starting slab of 2.5-5.0 lakh per year, the income tax rate has been brought down from 10% of income above Rs 2.5 lakh to 5% of income above Rs 2.5 lakh."If...
Supreme Court to consider banning charge-sheeted candidates from polls The Supreme Court has today agreed to hear a petition that seeks to ban anyone who has been charge-sheeted in a criminal case from contesting elections in India.BJP leader Ashwini Upadhyay, who is among one of the most prolific filers of public interest litigation in Indi...
COLUMN: Why it’s hypocritical for Rahul Gandhi to accuse Narendra Modi of taking money from co... One of the interesting aspects of the current accusations and counter accusations around the alleged funding of BJP's 2014 Lok Sabha campaign by corporate houses is the sheer hypocrisy of it.Let's see why.According to third-party figures, an estimated Rs 23,000 cr was...
Mining baron Sekhar Reddy arrested after Income Tax raids Sand miner Shekar Reddy has been arrested, two weeks after the seizure of crores of rupees and gold in an income tax raid. The arrest has come hours after Income Tax officials conducted a raid on Tamil Nadu's top bureaucrat chief secretary P Rama Mohana Rao at his home.It was...
Rahul Gandhi’s gives ‘earthquake evidence’ on Modi After keeping the nation waiting for 10 days, Rahul Gandhi today dropped his 'bomb' on Narendra Modi that he had promised would 'cause an earthquake'.Gandhi said a company based in Uttar Pradesh has written "that Modi has taken money from them multiple times over six mont...
Demonetization: RBI removes ‘explanation’ requirement for KYC accounts The Reserve Bank of India has responded to widespread criticism of its directive to collect 'explanations' from those depositing more than Rs 5000 by clarifying that this directive will not apply to bank accounts with proper documentation."On a review of the above, we advise ...
Fitch downgrades Anil Ambani’s Reliance Communications over Aircel merger Fitch Ratings has downgraded India-based Reliance Communications Limited's long-term rating to 'B+' from 'BB-'."It is our view that Rcom's plans to demerge its wireless business into a 50:50 joint-venture and sell 51% of its tower business, Reliance Infratel Ltd (Infratel), w...
Demonetization: Modi announces bumper prizes; 15 lakh users to get 1,000 rupees Narendra Modi announced several 'prize schemes' to promote cashless transactions.Under the schemes announced today, there will be two sets of prizes for consumers and another for small merchants.Under the first scheme, any customer who uses any electronic form of payment,...
Demonetizaton: Govt places limits on last minute deposits The Reserve Bank of India said that any person who continues to hold old notes of 500 and 1000 rupees in bulk will get only one more chance to deposit them into bank accounts and will also have to provide an explanation for the delayed deposit."Tenders of SBNs in excess of ₹ ...
Demonetization: Swaraj India says political parties could become money laundering centers Swaraj India party today said the Income Tax department's decision to continue to provide immunity to political parties from having to reveal their sources could turn them into money laundering centers.According to Section 13(A) of the Income Tax Act, 1961, if you have regist...
UPA-era procurement delays kept us back – BSNL CMD BSNL Chairman and Managing Director Anupam Shrivastava blamed delays in procuring key equipment for the present backward condition of the state-owned telecom operator.The company, which was once profitable and dominated India's telecom sector, has run up huge losses in the la...
BSNL JE 2016 recruitment frozen after complaints to DoT – CMD Shrivastava BSNL Chairman and Managing Director Anupam Shrivastava said the recruitment of Junior Engineers (JEs) into the telecom company has been frozen by the Department of Telecom on the basis of complaints."It is being held up by the Department of Telecom... due to complaints," Shri...
DEMONETIZATION: Wholesale Price Inflation falls to 3.15% in November The annual rate of inflation, based on monthly WPI, stood at 3.15% for the month of November, 2016 as compared to 3.39% for the previous month and -2.04% during the corresponding month of the previous year.The fall is largely expected due to the impact of the withdrawal of h...
Domino’s Pizza starts cashless facility for phone orders Domino's Pizza has started cashless payment facility for those who order by phone as well."Post demonetization, we have seen many customers choosing to order online. Consumers coming to our restaurants to dine in or carry out are able to pay With Credit caras or Wassets. Howe...
Taxes will be made “more reasonable” in cashless India – Jaitley Taxes in India will be made more reasonable as more and more transactions switch to the cashless mode, finance minister Arun Jaitley said."As more and more transactions are made cashless, they will come under taxation.. (and with this) taxes will be made more reasonable, both...
After pumps, Bata stores to provide cash withdrawal The story has been withdrawn by the company.
Modi says people who deposited others’ money may get to keep it all Opening a new front in the fight against black money, Prime Minister Narendra Modi today said people who were forced or tricked into depositing other people's money into their bank accounts may be allowed to keep the entire sum for themselves."Do not touch that money," Modi s...
Petrol Pumps, Airlines Will Not Take Old Notes From Saturday | DEMONETIZATION Old notes will no longer be accepted at petrol pumps and airline ticket counters starting from Saturday, according to sources.So far, petrol pumps and airlines had been given an exemption from demonetization of 500 and 1000 rupee notes.However, in an effort to control...
Fitch revises US growth estimates on Trump election, says protectionism to rise The surge in populism and anti-establishment sentiment witnessed in the Brexit vote and Donald Trump's victory in the US presidential election seem likely to push structural policies in the direction of economic nationalism, said Fitch Ratings in its latest global economic outloo...
BJP asks all MPs, MLAs to submit bank statement to party As part of the ongoing crackdown on tax evasion and illicit funds, the Bharatiya Janata Party has asked all its MPs and MLAs to submit the full details of their banking transactions from Nov 8 onwards.The central leadership of the party will examine the bank statements of the...
7 ILLOGICAL REASONS to oppose DEMONETIZATION The current demonetization move by the Narendra Modi government has seen a lot of accusations and counter-accusations being levelled by both the supporters and opponents of the move.While the government has tried to deal head on with the official accusations levelled by opp...
DEMONETIZATION: How some earned lakhs standing in queues The government has banned over-the-counter exchange of old 500- and 1000-rupee notes due to suspected gaming of the system by those with black money. According to banking industry sources, the over-the-counter exchange system was being massively misused by hawala operators and ot...
Despite Demonetization, India will beat China in GDP growth: Fitch Ratings Despite a moderation in India's GDP growth rate in the short term due to cash crunch, the Indian economy will still grow faster than that of China, global ratings agency Fitch said."We still expect India’s GDP growth to trend higher than China’s in the medium term," said the ...
FULL TEXT: Ratan Tata’s statement on Demonetization Ratan Tata courtsey:tata.comRatan Tata, one of the most respected business figures in India and the chairman of Tata Trusts, has drawn attention to the practical difficulties faced by ordinary citizens in dealing with the ongoing currency exchange program.Tata, who was o...
FULL TEXT: Ratan Tata’s statement on Demonetization Ratan Tata courtsey:tata.comRatan Tata, one of the most respected business figures in India and the chairman of Tata Trusts, has drawn attention to the practical difficulties faced by ordinary citizens in dealing with the ongoing currency exchange program.Tata, who was o...