Economic activity is expected to rebound due to a supportive monetary policy, the effect of the Goods and Services Tax, and the eventual formalisation of the economy due to demonetisation, according to a report by Fitch Ratings.
The withdrawal of cash due to demonetisation had temporarily hurt economic growth in India, it said.
“Demonetisation could help boost government revenue by moving economic activity from the informal to the formal sector, but the withdrawal of 86% of the value of currency in circulation last November created a cash crunch, temporarily hurting economic activity,” the report said.
“Nevertheless, we expect growth to pick up soon, helped by the supportive monetary policy of the previous two years — which was facilitated by a surge in bank liquidity due to demonetisation — and stepped-up structural reforms,” the report added. “The Goods and Services Tax, applicable from 1 July 2017, will facilitate trade within India and lower transaction costs.”
Debt reduction
On the other side, the report highlighted uncertainty over the government committing to reducing its debt and the detrimental effect of farm loan waivers on states’ finances.
“An official committee reviewing the Fiscal Responsibility and Budget Management Act recommended lowering government debt to 60% of GDP, but it remains uncertain whether the government will commit to this target,” the report said. “Moreover, farm loan-waiver schemes rolled out across an increasing number of Indian States could significantly affect state government finances and undermine efforts to bring down general government debt.”
