‘Note ban will give room for stimulus’

Mumbai: The withdrawal of high-denomination currency

notes

will provide the headroom for a policy stimulus to the Indian economy in the next budget. The lower inflation following monetary contraction will pave the way for a rate cut, while the additional revenue to the government will create the headroom for a large investment stimulus, according to Pranjul Bhandari, chief economist,

HSBC India

.

“A back-of-the-envelope calculation indicates that the gains to the fisc would be around Rs 1.3 lakh crore. Half of this could be from additional tax on undeclared income and half from currency in circulation that does not return,” said Bhandari speaking to TOI.

According to Bhandari, the sharp contraction in money supply would result in the GDP falling by 70 basis points to 100 basis points over a year, with the maximum impact in the immediate two quarters (100 bps = 1 percentage point). But as currency printing picks up, demand would normalise.

“Lower growth for a few quarters means that the output gap will take longer to close, and inflation will be lower, making us confident on our 25-bp rate cut call for December 7,” said Bhandari.

“The first set of data on the impact of demonetisation will be the producer price index, which will be available in December. This will give some indication of the impact of demonetisation on the economy,” she said.

According to Bhandari, there is uncertainty on the extent of the fiscal bounty the government will receive as a result of the demonetisation. “There is much talk of a large one-time fiscal bounty for the government. However, neither its timing nor its quantum can be taken for granted. As long as the RBI is open to exchanging old notes for new ones, it cannot extinguish the liability and transfer funds to the government. Given the legal status of currency notes, it comes as no surprise that so far, the RBI has not officially signed up for an end date for the scheme,” she said in a report.