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  3. Disruption from demonetisation should be short-lived: S&P

Disruption from demonetisation should be short-lived: S&P

15 Dec 2016 Evaluate

Global rating agency S&P in its latest report has said that as per it’s base case scenario, the disruption from demonetisation should be short-lived with demand revival in the next one to two quarters, limiting the impact on Indian banks and corporate and in the long run, demonetisation and the GST could result in a wider tax base and greater participation in the formal economy.

The rating agency expects both demonetisation and the goods and services tax (GST) to adversely impact some sectors of the economy in the short run but have long-term benefits with demand revival in the next one to two quarters, limiting the impact on Indian banks and corporates. It said that both GST and demonetization are likely to have a higher disruptive impact on the informal, rural, and cash-based segments of the economy.  S&P had recently revised its growth forecast for India to 6.9% in 2016-17 from 7.9% earlier.

The report suggested that the extent of the impact from demonetization depended on how quickly the government was able to increase its supply of new notes, the duration of the current cash crunch and the pace of the shift in the Indian economy to “less-cash” transactions.

It also cautioned that in a less-likely downside scenario, the shock of demonetization will not be absorbed within the next few months and the economic disruption will spill over into fiscal 2018, and potentially coincide with the introduction of the GST. Economic growth will stay lower for longer, raising stress levels on corporates, banks, and other financial institutions; although the sovereign rating is likely to remain resilient.

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