Demonetisation: Analysts warn of speed bumps before GDP growth rebound

NEW DELHI/MUMBAI: The scrapping of Rs 500 and Rs 1,000 notes, which comprised about 86% of all cash in circulation, will put a dent in India’s growth. How big is a matter of speculation — some analysts pegged the setback at a few tenths of a percentage point, others slashed estimates by half. The most pessimistic view would possibly see India slipping back behind China and losing its title of fastest growing major economy in the world.

Brace for a slowdown in the remaining five months of FY17 as demand dries up in response to the lack of liquidity, but expect an equally strong rebound in a few quarters when the expected benefits of the move kick in, was the predominant view among analysts.

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“The economy has had a heart attack this quarter,” said Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch. “We expect the impact of this to resonate for at least two quarters, impacting GDP by 50 basis points for the fiscal year.”

Most put the revised number at around 7% against earlier estimates of near 8%, an optimism that had been bolstered by good monsoons and a pay commission-led consumption boost. The Indian economy expanded 7.6% in FY16. The International Monetary Fund had put FY17 growth at the same level. China is likely to grow at 6.6% in 2016 and is expected to slow to 6.2% in 2017.

HDFC Bank expects India’s GDP to grow at 7.3% versus the earlier estimate of 7.8%. CARE Ratings slashed its projection for gross value added (GVA) to 7.1-7.3% from 7.6%. Services will get hit the most in the December quarter on account of losses in trade, hotels and transport due to the volume of cash transactions involved in these activities.

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“Agriculture is expected to be least impacted with the major shock being absorbed in the first two-three weeks itself as there have been issues in sales at mandis due to the cash crunch presently,” CARE Ratings said in a report.

ICRA cut its growth forecast by 40 basis points. It had earlier forecast GDP and GVA to grow 7.9% and 7.7%, respectively. One basis point is one hundredth of a percentage point.

“Consumption-oriented sectors, particularly those which witness a sizable magnitude of cash transactions, such as real estate, construction, jewellery, retail, travel and tourism and trade are likely to be most affected. Cash-based transactions in the unorganised sector would also get disrupted, particularly in rural areas,” said Aditi Nayar, senior economist at ICRA.

Investment bank Ambit Capital took a far bleaker view. It cut GDP growth estimates for FY17 to 3.5% from 6.8% earlier and for FY18 to 5.8% from 7.3%, even penciling in the possibility of a contraction in the ongoing third quarter.100

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