Economic disruption on account of demonetisation to be short-term in nature: Moody's

MUMBAI: Disruption in economic activity on account of demonetisation would be short-term in nature according to global ratings firm Moody’s. The GDP numbers for the December quarter surprised many with a growth of 7% despite some slowdown in activity during the quarter due to high value note ban by the government.

“Latest data support our expectation that the economic disruption caused by demonetization will be short term in nature.” Said a report by the ratings firm. “ As liquidity conditions continue to normalize, we expect the economy to keep picking up.”

If most of the old notes are deposited into the banking system, legitimizing previously undeclared incomes and wealth, the benefits to the government related to higher future tax collection will accrue from measures aimed at leveraging the information obtained when notes were deposited, it said. Such measures have yet to be detailed.

“As we expected, demonetization has weighed on real economic activity. However, the worst of the liquidity crunch has passed, which should support a rebound in consumption and investment.” Said Moody’s.

The ratings firm expects that in the medium term demonetization will strengthen India's institutional framework by reducing tax avoidance and corruption. It should also result in efficiency gains through greater formalization of economic and financial activity, which would help broaden the tax base and expand usage of the financial system. All this would be credit positive for the sovereign.