A delay in consumption and investment, disruptions to supply chains and farmers being unable to buy inputs could be some macro-economic effects of the demonetisation of Rs 500 and Rs 1,000 notes, Fitch Ratings said on Friday. Director of the agency’s Asia-Pacific Sovereigns Group Thomas Rookmaaker said the discontinuation of the high-value notes was a one-off event which would not generate a significant structural shift in economic activity from the informal to the formal sector.
“There are many elements to the demonetisation, which makes it difficult to quantify the impact on real gross domestic product growth and explains the wide range of forecasts by different analysts,” Rookmaker said. There will be a likely decline in GDP growth for this quarter, but the impact for the financial year as a whole may still be moderate, he said. “People find inventive ways around the cash crunch as well - there is always the art of jugaad.”
On a positive note, Rookmaaker said the country’s financial position would get a boost from the Centre’s move as demonetisation will encourage more people to declare their earnings. Moreover, the government will benefit from the profit earned from unchanged notes collected by the Reserve Bank of India.
Earlier in a report, Fitch Ratings had observed that demonetisation was likely to affect economic sectors relying on cash transactions, and that it would have a negative impact on bank asset quality. “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,” said the report.
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