The government’s ban on high-value notes is expected to come as a shot in the arm for financial savings in the long term as households may cut down allocation for physical assets such as gold and property, says a Morgan Stanley report.
According to the global financial services major, this could affect economic activity in the near term, but will be more than offset by the positive impact resulting from improved transparency and tax compliance in the medium term.
”... households have traditionally parked their savings in physical assets such as gold and property. This move would also have an impact on their allocation decisions and have the impact on improving financial savings within the economy,” Morgan Stanley said in a research note.
From a funds flow perspective, household physical savings stand at around USD 270 billion (13 per cent of GDP) while financial savings are USD 160 billion (7.7 per cent).
In a crackdown on black money, fake currency, corruption and terror financing, Prime Minister Narendra Modi last night announced demonetisation of Rs 1,000 and Rs 500 notes with effect from today.
“We believe this is a continuation of the government’s reform agenda, with a focus on improving the business environment,” the report said.
By curbing black money, it will help improve tax compliance in the medium term, which is much needed given the very low number of tax payers currently approximately at just 1 per cent of the total population.
“We believe this move will help reduce black money more systematically, and in the long term improve the ease of doing business in India,” it added.
The government’s precision strike could hurt economic activity in the near term, particularly the rural economy, where a large proportion of transactions are still conducted using cash, and spending on big—ticket items such as white goods, automobiles and property.
However, this will be more than counterbalanced that will consequently benefit public finances, the report added.