Demonetization likely to be credit positive for sovereign over time: Moody’s
MUMBAI: Even as the government and several economists are debating the real impact of demonetisation, a research report by Moody’s say that the process of withdrawing the high denomination notes by Narendra Modi government may yield positive results in the long run.
“We continue to believe 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,” the Moody’s research report said.
The government in November last year demonetised Rs 500 and Rs 1,000 currency notes. According to the RBI data these two currency notes constituted about 87% of the total currency notes in India.
India’s persistent fiscal deficits have resulted in a relatively large general government debt burden (about 68% of our forecast for 2017 GDP) compared to peers. This is a key constraint on India’s government credit profile.
Given India’s low income levels and large spending commitments on wages, social programs and infrastructure development, the debt burden is likely to remain high for some time. Any contribution that demonetization makes toward enhancing revenue generation, by broadening the tax base and formalising economic activity, would foster a strengthening of India’s credit quality, the research report added.
According to the research, 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. Such measures have yet to be detailed.
“We continue to believe 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,” the Moody’s research report said.
The government in November last year demonetised Rs 500 and Rs 1,000 currency notes. According to the RBI data these two currency notes constituted about 87% of the total currency notes in India.
India’s persistent fiscal deficits have resulted in a relatively large general government debt burden (about 68% of our forecast for 2017 GDP) compared to peers. This is a key constraint on India’s government credit profile.
Given India’s low income levels and large spending commitments on wages, social programs and infrastructure development, the debt burden is likely to remain high for some time. Any contribution that demonetization makes toward enhancing revenue generation, by broadening the tax base and formalising economic activity, would foster a strengthening of India’s credit quality, the research report added.
According to the research, 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. Such measures have yet to be detailed.
