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
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%.