New Delhi: The government's demonetisation move is expected to keep informal money circulation in check and is likely to be positive for banking liquidity as well as medium-term fiscal resources of the company, says a Goldman Sachs report.
In a bid to fight against black money, fake currency, corruption and terror financing, Prime Minister Narendra Modi announced demonetisation of Rs 1,000 and Rs 500 notes on Tuesday night.
According to the global financial services major, the move will be negative for near-term economic activity, but a positive step over the medium term.
This reform is expected to increase transparency, accountability and shifts more transactions through electronic mediums and the banking system, it noted.
"More importantly, undeclared cash when exchanged at banks over the next few months with an associated identity card may be tracked by tax authorities and help increase the tax base of the economy, which is currently running below the regional average," Goldman Sachs said in a research note.
It added that "this could help the government bring the fiscal deficit down to 3 percent in 2017-18 from the budgeted 3.5 percent in 2016-17".
The budget for fiscal 2017-18 is likely to be presented in the first week of February.
"From an economic standpoint, this reform is likely to have material implications across money supply, consumption spending, fiscal policy and eventually inflation," Goldman Sachs said.
Nearly 10 percent of total household financial assets are held in currency, higher than those held in equities and debentures.
From growth perspective, the reduction in currency in circulation is likely to be negative for short-term consumer discretionary spending.
Cash-heavy sectors such as jewellery, restaurants, food and beverages and transport, among others, are likely to witness a drop in sales. These sectors account for nearly 50 per cent of overall household spending and this places some downside risks to near-term growth, according to Goldman Sachs.
It noted that "gold import demand is also likely to be impacted as a result of reduced end-consumer jewelry demand".