Note cull negative for near-term eco activity: Goldman report

THE REPORT SAID THE REFORM MAY HAVE MATERIAL IMPLICATIONS ACROSS MONEY SUPPLY, CONSUMPTION SPENDING, INFLATION

The government’s announcement to demonetise ₹500, ₹1,000 notes to curb black money is positive for banking system liquidity but is negative for near term economic activity, says a report.

“The announcement to curb informal circulation of money is likely to be positive for banking system liquidity as well as medium-term fiscal resources and financialization, but negative for near-term economic activity,” Goldman Sachs said in a report released on Thursday.

The report said from an economic standpoint, this reform is likely to have material implications across money supply, consumption spending, fiscal policy and eventually inflation.

The pace of increase in currency in circulation had risen significantly over the past year to 17.3% year on year in October 2016, contributing to nearly 20% of the overall increase in money supply over the same time period.

“With individuals depositing their cash at bank accounts, we think M3 growth is likely to switch away from currency into bank deposits over the next month,” it said.

Nearly 10% of total household financial assets are held in currency, higher than the proportion held in equities and debentures. It said the reform is a positive step over the medium-term as it increases transparency, accountability and shifts more transactions through electronic mediums and the banking system.

The undeclared cash when exchanged at banks over the next few months with an associated identity card, may be tracked by tax authorities and help increase the tax base of the economy.

“This could help the government bring the fiscal deficit down to 3% in the financial year 2017-18 from the budgeted 3.5% in in the financial year 2016-17.”