Demonetisation: India to slip behind China in GDP growth

19 November 2016

The Narendra Modi government's bold demonetisation move may have put paid to India's claim of being the fastest-growing economy in the world, with brokerages and economists revising their GDP growth estimates sharply downward as a result of the cash squeeze created in the economy, reports The Economic Times.

Before the demonetisation earlier this month, the Indian economy was projected to grow at above 7.5 per cent in FY17, with the International Monetary Fund (IMF) raising its projections by 0.2 percentage points this October to 7.6 per cent for 2016-17 and also for 2017-18.

In July, the World Bank projected India's growth at 7.6 per cent in 2016-17. Rating agency Fitch earlier this year had projected India's real GDP to accelerate to 7.7 per cent in 2016-17 and 7.9 per cent in 2017-18.

The economy expanded at 7.6 per cent in financial year 2015-16, outpacing China for the second year in a row.

After demonetisation, GDP growth projections for the Indian economy for FY17 have slipped to as low as 3.5 per cent. In comparison, the Chinese economy has been growing at around 6.7 per cent this year for three quarters in a row.

Broking house Ambit Capital on Friday lowered its FY17 GDP growth forecast for India by 330 basis points, saying it expects GDP growth to decelerate from 6.4 per cent in the first half of FY17 to 0.5 per cent year-on-year in the second half of FY17 with a distinct possibility of GDP growth contracting in the third quarter.

"The demonetisation-driven cash crunch that is playing out in India will paralyse economic activity in the short term. We expect a strong 'formalisation effect' to play out as nearly half of the non-tax paying businesses in the informal sector (40 per cent share in GDP) will become unviable and cede market share to their organised sector counterparts. We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we have cut our FY18 GDP growth estimate to 5.8 per cent YoY (from 7.3 per per cent)," Ambit economists Ritika Mankar Mukherjee, Sumit Shekhar and Prashant Mittal said in a note.

The economists have also scrapped their March 2017 Sensex target of 29,500 and pegged their Sensex target for March 2018 at 29,000.

Madan Sabnavis, chief economist of CARE Ratings, also anticipates a big hit on GDP, but has a slightly healthier target.

He says India see some pain in the GDP in third quarter as well as fourth quarter, but longer term the recovery is well on track and the economy should recover. "So FY17 GDP number might come down, but FY18 hopefully will not," he said in an interview with ETNow.

"Earlier we had something like 7.8 per cent (GDP target) for FY17. We still need to work out what exactly would be the impact based on what happens in the next one and a half months. But my own sense is that we will moving more towards the 7.5 per cent range or maybe even lower than that," Sabnavis said.

Brokerage Anand Rathi Securities said India's GDP will decline over the next two quarters due to reduction in overall spending. "After a slow rate of GDP growth for around six months, the subsequent two years could see sharp 'hockey stick' revival in growth," it said.

West Bengal finance minister Amit Mitra on Wednesday said the demonetisation move will result in the national GDP losing Rs25,000 crore each day.   

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