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Demonetisation will be credit positive for India in medium term: Moody’s

LiveMint logoLiveMint 01-03-2017 Asit Ranjan Mishra

New Delhi: A day after the Central Statistics Office (CSO) data belied the expectation of a sharp dip in economic activity in the December quarter, Moody’s Investor Service said that the latest data supports its expectation that the economic disruption caused by demonetisation will be short term in nature and that in the medium term note ban will be credit positive for the country.

The economy grew at a healthy 7% in the third quarter (October-December) of 2016-17 against 7.4% in the second quarter (July-September). Analysts polled by Reuters had expected a 6.4% growth rate in the quarter to December.

“We continue to believe that in the medium term demonetisation will strengthen India’s institutional framework by reducing tax avoidance and corruption. It should also result in efficiency gains through greater formalisation 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,” the rating agency said in a statement on Wednesday.

The rating agency currently has assigned the lowest investment grade for India just above junk status with a positive outlook.

Moody’s said any contribution that demonetisation makes toward enhancing revenue generation, by broadening the tax base and formalizing economic activity, would foster a strengthening of India’s credit quality.

“If most of the old currency notes have been deposited into the formal banking system, as has been reported, legitimizing previously undeclared incomes and wealth, the benefits to the government related to higher future tax collection would most likely accrue from further measures aimed at leveraging information obtained when notes were deposited,” it said.

The rating agency said the worst of liquidity crunch has passed, which should support a rebound in consumption and investments.

In January 2017, taking into account its expectations of a marked yet short-lived negative impact from demonetisation, Moody’s lowered its real GDP forecasts for the financial year ending March 2017 (FY2016-17) to 6.9% from 7.5%, and to 7.3% from 7.5% for FY2017-18.

On Tuesday, CSO retained its earlier growth projection for the same financial year at 7.1%.

“We expect growth to moderate to about 6.4% in the January to March 2017 quarter from 7.0% in the October to December 2016 quarter, before picking up above 7.0% thereafter, as the temporary drag from demonetization fades,” Moody’s said in a statement.

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