Dramatic slowdown of Indian GDP expected post demonetisation

Experts point out possible short-term to long-term effects

Business & Politics

News - Biz@India

December 1, 2016

/ By / Kolkata

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Predictions on growth of Indian GDP after the move by the demonetisation move by the government are varied

Predictions on growth of Indian GDP after the move by the demonetisation move by the government are varied

Post demonetisation, some are predicting adverse effects on the Indian economy while others believe it is only for the short term.

Although demonetisation has been hailed by a few as a bold move, many experts have come forward to show the negative effects it may have in the short term which might extend to a long term. There has been cheer over expansion of India’s growth output for the July-September quarter which saw a slight hike at 7.3 pc compared to 7.1 pc registered in the preceding quarter of April-June 2016. However, a report by Fitch Ratings has now projected a slowdown of the economy, owing to the recent policy of demonetisation by the government.

“Indian growth has also been revised down to reflect temporary disruptions to activity related to the RBI’s surprise demonetisation of large-denomination bank notes,” Fitch said, revising the real GDP growth forecast of India down to 6.9 pc for 2016-17, from the 7.4 pc it had projected earlier. The report stated, “Time spent queuing in banks is also likely to have affected general productivity. The impact on GDP growth will increase the longer the disruption continues,” adding, “Most importantly, demonetisation is a one-off event. People who operate in the informal sector will still be able to use the new high-denomination bills and other options (such as gold) to store their wealth.”

Economists point out that with a daily limit on the amount of old notes that can be exchanged, consumers are holding off from spending. Private consumption accounts for almost 60 pc of the GDP in India, so the current situation can have large economic consequences. Reports that the cash crunch is affecting industries and cutting down on production as well as sales have surfaced. Some claim that a threat of job losses at several small and medium enterprises is a strong possibility. However, others point out that this is only for the short term. Moody’s Investors Service stated in a report that the shock ban on high-denomination currency notes will in the near term significantly disrupt economic activity and lead to weaker growth, but in the long run can boost tax revenues and translate into faster fiscal consolidation. Titled ‘Indian Credit – Demonetisation Is Beneficial for Indian Government and Banks; Implementation Challenges Will Disrupt Economic Activity’, the report mentioned that demonetisation is affecting all sectors of the economy in different ways, with banks being the key beneficiaries.

Rain check for the economy

Nationwide protests were observed this week over the decision of demonetisation as many have feared that the problem will be much larger than a minor inconvenience in the short term. Adding to opposition from citizens and political parties, economists have joined in to highlight the dangers of the move for the economy. The former Prime Minister of India who is also an economist, Dr Manmohan Singh termed the move a “monumental mismanagement” in his speech at the Parliament and expressed concern. He stated, “In my opinion, the way the scheme has been implemented will hurt agricultural growth in our country, will hurt small industry, will hurt all those people who are in the informal sector of the economy. And my own feeling is that the national income, that is the GDP, can decline by about 2 pc as a result of what has been done. This is an underestimate.”

Nobel laureate and renowned economist Dr Amartya Sen was also not entirely convinced of the long term benefits of demonetisation, as he shared with an Indian daily, “It is hard to see how this move will benefit the economy. Good policies sometimes cause pain, but whatever causes pain – no matter how intense – is not necessarily a good policy.”

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