Centre’s move will boost Indian economy

Benefits would be seen in the medium to long term; struggle would be for a small time.

Leading foreign as well as domestic broking houses have given a major thumps up to the governments latest decision to weed out black money from the economy saying that the move will control inflation, improve bank deposit growth and tax collection in the medium to long term. This according to them could trigger rating upgrades by credit rating agencies.

While citizens will be inconvenienced in the short term, Sonal Verma, chief economist at Nomura Financial Services said this is a big medium term positive for the economy. “As the old currency notes are deposited with banks, bank deposit growth will witness a pickup and currency in circulation will moderate - a positive for banking sector liquidity. When some of the black money is brought under legitimate channels, the government's tax revenue collections will get a boost. Finally, we believe the move generally bodes well for the inflation outlook since black money was associated with higher inflation,” she added.

Analysts at Edelweiss Financial Services added that the clamp down on black money coupled with GST would lead to lead to significant improvement in tax-to-GDP ratio in the medium term.

The tax to GDP ratio in India is abysmally low at 16.6 per cent when compared to the OECD average of 34 per cent.

“Further, curtailment of fiscal deficit will eventually lead to consistent rating upgrades,” Edelweiss said.

Rating agency Crisil Research said that the direct positive impact would be felt on government’s tax revenue collections, its ability to spend on infrastructure investments and the resultant impact on growth.

“This is critical given that private infrastructure investments remain weak. It will also have positive spillover effects on employment, income and domestic growth,” Crisil said.

The ratings agency also added that higher income tax collections arising from better compliance would also offer scope to reduce the tax rates over the long term, which would increase disposable incomes.

“This can have a positive impact on consumption demand in the long term,” it said.