Demonetisation to cut tax avoidance and corruption: Moody's Investors

US-based agency however projected growth to slow to 6.4% in the January-March quarter

Demonetisation will be credit positive for India as it is likely to reduce tax avoidance and corruption, Moody's Investors Service said on Wednesday.

Besides, it said, the country remains resilient to economic disruption andthe worst of the liquidity crunch has passed, which should support a rebound in consumption and investment.

The US-based agency however projected growth to slow to 6.4 per cent in the January-March quarter, from seven per cent in the previous three months.

"Looking ahead, we expect remonetisation to continue at a similar pace," Moody's said in its report on demonetisation.

"We continue to believe that in the medium term demonetisation will strengthen India's institutional framework by reducing tax avoidance and corruption. It should also result in efficiency gains through greater formalisation of economic and financial activity, which would help broaden the tax base and expand usage of the financial system.

"All this would be credit positive for the sovereign," it said.

The agency said that if most of the old notes are deposited into the banking system, legitimising previously undeclared incomes and wealth, the benefits to the government related to higher future tax collection will accrue from measures aimed at leveraging the information obtained when notes were deposited.

"Such measures have yet to be detailed," it added.

Moody's said however that demonetisation has hit bank's asset quality and demand for credit. "This trend is likely to continue over the next few months. We also expect asset quality to deteriorate in the current quarter, but Indian banks have sufficient buffers to withstand the impact."

More positively, banks have experienced significant deposit inflows as a result of demonetisation, it said.

"However, we expect bank deposits to increase by only around one to two per cent, with cash remaining the dominant means of retail transactions," it added.