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Demonetisation to cut tax avoidance, corruption; credit positive: Moody's

New Delhi: Demonetisation will be credit positive for India as it is likely to reduce tax avoidance and corruption, Moody's Investors Service said today.

Besides, it said, the country remains resilient to economic disruption and the worst of the liquidity crunch has passed, which should support a rebound in consumption and investment.

The US-based agency however projected growth to slow to 6.4 percent in the January-March quarter, from 7 percent in the previous three months.



"Looking ahead, we expect remonetisation to continue at a similar pace," Moody's said in its report on demonetisation.

"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," it said.

The agency said that if most of the old notes are deposited into the banking system, legitimising 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.

"Such measures have yet to be detailed," it added.

Moody's said however that demonetisation has hit bank's asset quality and demand for credit. "This trend is likely to continue over the next few months. We also expect asset quality to deteriorate in the current quarter, but Indian banks have sufficient buffers to withstand the impact."

More positively, banks have experienced significant deposit inflows as a result of demonetisation, it said.

"However, we expect bank deposits to increase by only around 1-2 percent, with cash remaining the dominant means of retail transactions," it added.

Moody's said real estate, auto and steel sectors are picking up after demonetisation prompted weakness in sales.

"We expect that trend to continue over the second half of this year. Steel production also took a substantial hit but rebounded quickly and is performing better than we

"Meanwhile, demonetisation has had little impact on Indias rated oil and gas refining and marketing companies," it said.

As per the data released by Central Statistical Organisation yesterday, Indian economy grew by 7 percent in the October-December quarter, despite demonetisation. It
projected economy to grow by 7.1 percent in 2016-17.

On 8 November, the government scrapped Rs 500 and Rs 1,000 notes, which accounted for approximately 86 percent of the banknotes in circulation by value.

"The recovery in the total stock of currency in public circulation, which had declined from about Rs 17 lakh crore before demonetisation to a low of Rs 7.8 lakh crore in early December, before rebounding to about Rs 9.8 lakh crore in early February 2017, illustrates this incremental improvement in liquidity," Moody's said.

Updated Date: Mar 01, 2017 16:27 PM

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