note demonetisation

Demonetisation: Short-term pain might outweigh uncertain long-term gains, says Fitch Ratings

The currency ban was a ‘one-off event’, and those who operate in the shadow economy will still be able to use the new notes, the agency said.

The short-term pain might outweigh the uncertain long-term gains of demonetisation, even though the intentions behind the move were in keeping with broader reform efforts, Fitch Ratings said on Tuesday. The Centre’s decision to scrap Rs 500 and Rs 1,000 notes has caused “short-term disruption in India’s economy”, it said in a newsletter titled “Benefits of Demonetisation Are Highly Uncertain”. They added that this had led them to downgrade the country’s growth forecasts for 2017.

In November 2016, Fitch Ratings had revised its forecast for India’s gross domestic product growth to 6.9% from 7.4% for the financial year ending March 2017.

“The withdrawal of bank notes has left consumers without cash needed...and farmers without funds to buy seeds and fertilisers,” the agency said . “Supply chains have been disrupted, and time spent queueing in banks has meant lost hours of productive work. The impact on the economy will increase the longer the disruption continues.”

While noting that the currency ban had some “potential benefits”, Fitch Ratings warned that demonetisation was a “one-off event” and that its positive effects were unlikely to “last long enough to make a significant difference”. The move may succeed in pushing economic activity from the “informal to the formal sector”, but those operating in the shadow economy will “still be able to use the new high-denomination bills and other options (like gold) to store their wealth”, the ratings agency said.

The statement from Fitch Ratings contradicts Prime Minister Narendra Modi’s mantra of “short-term pain for long-term gains”, which he adopted since his government’s decision came under fire from various quarters. Modi, along with several ministers of his government and the Reserve Bank of India, had maintained that banks and ATMs had enough money, even though citizens had been grappling with a cash crunch.

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