Franklin Templeton believes that Prime Minister Narendra Modi's demonetisation drive may lead to a long-term boost for India's direct tax collections.

As per the report, though India's Gross Domestic Product (GDP) likely to drop in Q3FY17, but there could be an increase in direct tax collections in the longer term, which will pave way for increase in investment by the government.

In near term, as a share of the unaccounted money makes its way into formal channel, the government likely benefit from higher income tax collections. This may help government's FY17 fiscal deficit target, especially post the shortfall in anticipated spectrum revenues, the report said.

For the longer term, this may infuse a transition from unorganised to organized sector, which could thereby "enhance the government's ability to tax commercial transactions.

As a result, there is a likely structural improvement in tax to GDP ratio in Indian economy, the report added. Thus, the outlook on government finances remained Positive for both near and longer term.

Further, the report mentioned that lower demand because of demonetisation is likely to weigh negatively on the prices which could led to drop in the rural inflation.

However, for the longer term the outlook remained neutral. "Demand is likely to recuperate post government spending, which should have positive impact on employment and disposable income," it said.