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Demonetisation: Rating agency Fitch to revise down India’s Q4 growth forecast

Ratings agency Fitch said on Tuesday it would revise down its India growth forecasts for the fourth quarter of 2016 after the government’s shock move to pull high-value currencies out of circulation

black money crackdown Updated: Nov 22, 2016 19:22 IST
AFP
Volunteers of Delhi’s ruling AAP march against the Centre’s demonetisation move, in New Delhi on Tuesday.
Volunteers of Delhi’s ruling AAP march against the Centre’s demonetisation move, in New Delhi on Tuesday.(PTI)

Ratings agency Fitch said on Tuesday it would revise down its India growth forecasts for the fourth quarter of 2016 after the government’s shock move to pull high-value currencies out of circulation.

Fitch Ratings said the move, aimed at forcing Indians to declare their untaxed money, had created a cash crunch that “seems to be holding back economic activity”, with consumers unable to make purchases, supply chains disrupted and farmers unable to buy seeds.

“Time spent queueing in banks is also likely to have affected general productivity,” Fitch said in a statement.

“The impact on GDP growth will increase the longer the disruption continues, but we will already need to revise down our forecasts to reflect what will almost certainly be a weak 4Q16.”

Read | Modi responsible for deaths due to demonetisation, book him for murder: Nirupam

India, the world’s fastest-growing major economy, operates largely on cash and huge queues have formed outside banks and ATMs in cities across India as people try to swap their old notes for new ones.

The government has said the November 8 move to scrap Rs 500 and Rs 1,000 notes will bring billions of unaccounted money into the formal banking system and ultimately boost the economy.

But Fitch said there were “considerable uncertainties” about the potential benefits, particularly as new, higher-denomination notes are introduced to replace the banned bills.

“There are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual,” it said.

Responses to the move have been mixed.

Many poor Indians have said they support it despite the disruption if it forces the rich to pay their taxes, but some economists say the impact on the wealthiest will likely be limited.

Read | Do you mind it? PM Narendra Modi seeks feedback on demonetisation

“We strongly suspect that those with the largest amount of ill-gotten gains do not hold their wealth in cash but instead have long since converted it into foreign exchange, gold, bitcoin or some other store of value,” wrote the former US Treasury Secretary Larry Summers, who has called for a moratorium on printing high-value notes, in a blog post on Monday.

“So it is petty fortunes, not the hugest and most problematic ones, that are being targeted.”

Only six people earning over 500 million rupees (now equivalent to $7.3 million) filed tax returns in 2012-2013, the latest figures available, even though an estimated 2,100 Indians have a net worth that exceeds $50 million.