Demonetisation: Short term pain may outweigh Indian economy's long term gains

Prime Minister Narendra Modi's demonetisation method has caused short-term disruption in India's economy so much so that it growth forecast for 2017 has been revised downwards by many. 

Dan Martin, Senior Analysts of Fitch Ratings said, “The impact on the economy will increase the longer the disruption continues, but Fitch has already revised India's GDP growth forecast for FY17 to 6.9% from 7.4%.”

The government itself believes that GDP in the current fiscal, even without demonetisation factored in, will grow at 7.1% as against 7.6% as estimated earlier. 

Fitch believes that demonetisation will boost revenues for the government which will lead to formalising of many economic activities which were currently under the radar. 

It is possible, however, that this positive effect would soon outweigh the drag on revenue collection from lower short-term economic activity, Fitch said. 

On one hand, demonetisation is expected to boost government's finance, on the other hand, there are some short term uncertainties which may  outweigh Indian economy's long term gains, the ratings agency said.  

It said, “The positive impact on funding conditions will depend on deposits remaining in banks beyond the next few months. There is nothing to prevent them being withdrawn again.”