Asian Development Bank (ADB), anticipating India to grow at 7.4% in 2017-18 and 7.6% in 2018-19, in its latest report has said that the demonetisation of high-value bank notes is likely to have a positive impact over the medium term and coupled with the forthcoming implementation of the goods and services tax (GST), will widen the tax net and improve tax compliance. It also said that with more people channelising their savings into the banking system, banks will have more money to lend at lower rates and lower aggregate deposit costs should improve bank profitability, further increasing their lending capacity.
The report titled ‘Asian Development Outlook’ has found that the note ban was to foster digitisation, improving tax compliance and channelising additional savings through the formal banking system. However, it also noted that India is a cash-intensive society, with an estimated 78% of consumer payments made in cash, hence the initial currency crunch, caused by the slow pace or remonetisation, hit economic activity, causing a temporary drop in consumption and employment.
Noting that the temporary drop in demand led to a decline in inflation, the ADB said that the return of demonetised notes caused bank deposits to surge and lending rates to drop and the steady progress in remonetisation is expected to rapidly rectify the situation.