India’s GDP growth to take a hit on demonetization

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The cash crunch arising out of demonetization is expected to paralyse economic activity in the short-term, and the 2017-18 GDP growth is likely to take a hit, analysts said.

According to a report by Ambit Capital, GDP growth is likely to decelerate from 6.4% in first half of this fiscal to 0.5% in the second half with a distinct possibility of GDP growth contracting in third quarter of this fiscal.From October-December 2016 until October-December 2019, Ambit Capital expects a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40% share in GDP) 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 cut our FY18 GDP growth estimate to 5.8% (from 7.3%),” the report said.

The demonetisation move is expected to disrupt economic activity in the short term, especially those segments where cash-based transactions are the norm like real estate, unsecured lending, real estate construction services and building materials.

“Whilst in the near-term, we expect these businesses to suffer, over the next couple of years the strongest players in these sectors will gain market share as competition from unscrupulous/unorganised players reduces,” the report added.

A report by Care Ratings titled ‘Impact of demonetization on GDP growth in FY17′ by Madan Sabnavis, Chief Economist, and Anushka Sawarkar, Associate Economist, said, the services sector is expected to be affected the most lved in these economic activities. Importantly, these losses, due to their inherent nature, can’t be recovered in the next quarter. For rest of manufacturing, demand side issues would exist till such times conditions stabilize and could get reversed in Q4. Hence, Industry is also expected to be impacted which will be more significant in the first 2-3 weeks post the announcement.

While consumer goods’ companies are also feeling the impact right now, with tight liquidity in the markets, the demand is likely to come back by next quarter. “Losses incurred would be recovered in the next quarter, particularly for consumer goods where there would be only deferment of purchase.

Even the SMEs in industry will have a major problem in adjusting production schedules as both payments and receipts flow in cash given their structures.

According to the Care Ratings’ report, as per initial estimate, overall GDP growth would be affected by 0.3-0.5%.

“As a response to the slowing GDP growth, we expect the RBI to consider rate cuts of 25-50 bps over the second half of FY17 itself,” the Ambit said.

The Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut benchmark interest rates by 0.25% to 6.25%. The next RBI policy review is on December 7

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