New Delhi, India’s note ban will have a positive impact on the economy in the medium term as the banks’ profitability is likely to go up with increased lending capacity and lowering of aggregate deposit costs, an ADB report said on Thursday.
“Demonetisation is likely to have a positive impact over the medium term. With more people channeling their savings into the banking system, banks will have more money to lend at lower rates. Lower aggregate deposit costs should improve bank profitability, further increasing their lending capacity,” according to an Asian Development Bank report released here.
“Along with the forthcoming implementation of the Goods and Services Tax (GST), demonetisation will widen the tax net and improve tax compliance,” ADB’s flagship economic publication Asian Development Outlook 2017 noted.
On November 8, 2016, the Indian government withdrew the legal tender status of all Rs 500 and Rs 1,000 bank notes.
“However, steady progress in issuing new notes is expected to rapidly rectify the situation. The temporary drop in demand contributed to a decline in inflation. The return of demonetised notes caused bank deposits to surge and lending rates to drop,” it said.
The report said that demonetisation intended to trip up corruption, counterfeiting, and the funding of terrorism.
“This decision augmented measures introduced earlier to fight corruption, including tax amnesties to encourage the disclosure of black money, agreements with other countries to share banking information, and the renegotiation of treaties to avoid double taxation,” it added.
The decision was envisioned as fostering digitalisation, improving tax compliance, and channeling additional savings through the formal banking system.
The report, however, also noted that India being a cash-intensive society, has an estimated 78 per cent of consumer payments made in cash.
“The initial currency crunch, caused by the slow replacement of demonetised notes, therefore hit economic activity, causing a temporary drop in consumption and employment,” it said.
“Because small enterprises generate a large share of India’s exports, and are highly dependent on cash, demonetisation impeded exports of gems, jewellery, and garments for a few months before the situation normalised. Gold imports spiked in November, with buyers reportedly purchasing gold with discontinued notes even at large premiums,” the report added.