CSO Set to Lay Bare Note Ban Bruises on Econ­omy, may Peg GDP Growth Be­low 7%

But FM says GDP may bounce back quickly in FY18 when note re­place­ment is over

The Economic Times - - Economy: Macro, Micro & More - Our Bureau

New Delhi: The sec­ond of­fi­cial es­ti­mate of GDP growth due on Tues­day is likely to show the econ­omy ex­panded be­low 7% in FY17, tripped by the No­vem­ber 8 de­mon­eti­sa­tion that dented the con­sump­tion de­mand.

The Cen­tral Statistics Of­fice’s first es­ti­mate re­leased on Jan­uary 6 pegged growth at 7.1% in FY17, but it did not in­clude the im­pact of de­mon­eti­sa­tion. On No­vem­ber 8, the gov­ern­ment had de­mon­e­tised ₹ 500 and ₹ 1,000 notes, with­draw­ing about 86% of the cur­rency. The re­sul­tant lack of cash damp­ened de­mand, de­cel­er­at­ing the In­dian econ­omy that was pegged to climb to near 8% growth in the year.

Since then, all es­ti­mates of growth have moved south, which is likely to be sub­stan­ti­ated by the CSO’s sec­ond of­fi­cial es­ti­mates on Fe­bru­ary 28. The Eco­nomic Sur­vey for FY17 pegs growth for the cur­rent fis­cal at 6.5%-6.75%. The IMF sees the econ­omy grow only 6.6% — a full per­cent­age point be­low its ini­tial es­ti­mate of 7.6%.

“It’s (de­mon­eti­sa­tion) suck­ing in cash, with­draw­ing it from the econ­omy, and then the vac­uum cleaner is go­ing in re­verse, slowly re­plac­ing cash but as I said, at a fairly mod­est pace. That’s led to a lot of cash short­ages that have af­fected con­sump­tion,” Paul A Cashin, as­sis­tant direc­tor in the IMF’s Asia and Pa­cific De­part­ment, and mis­sion chief of In­dia, said last week.

The ef­fect is likely to be most se­vere in the Oc­to­ber-De­cem­ber quar­ter, the peak cash short­age pe­riod. State Bank of In­dia ex­pects Q3 growth at 5.8% and an an­nual FY17 growth of 6.6%.

The Na­tional Coun­cil of Ap­plied Eco­nomic Re­search (NCAER), an in­de­pen­dent eco­nomic think tank, sees the econ­omy grow at 6.9% with the global eco­nomic un­cer­tainty adding to the de­mon­eti­sa­tion woes. Its ear­lier pro­jec­tion was 7.6%.

Helped by a good mon­soon, the agri­cul­ture sec­tor is ex­pected to do bet­ter, but both ser­vices and in­dus­try will suf­fer from the lack of cash. In­dus­trial pro­duc­tion was up a mea­gre 0.3% in the first nine months (April-De­cem­ber) of the cur­rent fis­cals. In­dus­try has an over 27% weight in the econ­omy dom­i­nated by ser­vices that ac­count for more than half of the na­tional in­come. The de­mand shock from de­mon­eti­sa­tion is ex­pected to fur­ther de­lay in­vest­ment re­cov­ery. In­vest­ments, as mea­sured by gross fixed cap­i­tal for­ma­tion, were pro­jected to con­tract 0.2% in the first es­ti­mates for FY17 re­leased by the CSO in Jan­uary this year.


On the pos­i­tive side, the econ­omy is ex­pected to bounce back quickly in FY18 as cur­rency re­place­ment is com­pleted. “We have al­most com­pleted the de­mon­eti­sa­tion process and it has been the smoothest pos­si­ble re­place­ment of cur­rency any­where in the world,” fi­nance min­is­ter Arun Jait­ley said at the Lon­don School of Eco­nom­ics on Satur­day.

The easier avail­abil­ity of the cur­rency is ex­pected to trig­ger the pent-up de­mand, yield­ing a sharp re­cover in the FY18. NCAER ex­pects growth rate to re­bound to 7.3% in FY18. The Eco­nomic Sur­vey gives a large range for FY18 growth at 6.75% to 7.5%.

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