Demonetisation: Global agencies downgrade India’s GDP forecast

Demonetisation will have a ‘negative’ impact on growth in the short run but for the full fiscal, the GDP decline would be ‘relatively moderate’, Fitch Ratings said.

By: ENS Economic Bureau | Mumbai | Published:November 26, 2016 1:07 am
Demonetisation, demonetisation effects, demonetisation debate, baks, India,India GDP, GDP,India's GDP growth, demonetisation GDP, Fitch Ratings, Deutsche Bank, DBS Bank, Bank reviews on demonetisation, cash, Cash crunch, inflation, economy news, india news, indian express news Deutsche Bank said India’s real GDP growth is expected to slow to 6.5 per cent in the current fiscal on the likely impact of demonetisation. (Reuters File Photo)

Global banks and rating agencies, including Fitch Ratings, Deutsche Bank and DBS Bank, have downgraded India’s growth in the wake of demonetisation of high-value notes, stating that “the impact on GDP growth is clearly going to be negative in the short run and depends to a large extent on how long the cash crunch is going to take”. Demonetisation will have a “negative” impact on growth in the short run but for the full fiscal, the GDP decline would be “relatively moderate”, Fitch Ratings said. “A significant decline in the growth number for this quarter is highly likely, but for the fiscal year as a whole the decline may still be relatively moderate,” Fitch Asia-Pacific Sovereigns Group Director Thomas Rookmaaker said.

“In India we expect GDP growth to accelerate in FY18 on the back of reform implementation, monetary easing of the past year and infrastructure spending,” Rookmaaker said. The macroeconomic effects of the cash crunch include a temporary delay of consumption and investment, disrupted supply chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues.

Deutsche Bank said India’s real GDP growth is expected to slow to 6.5 per cent in the current fiscal on the likely impact of demonetisation, while muted inflation may open room for additional rate cuts. Economic growth will see a moderation in the near term and would gradually recover to 7.5 per cent in the next financial year, it said.

“We expect growth to be impacted adversely in the present and next quarters due to the government’s temporary demonetisation initiative,” said a Deutsche Bank note, adding that GDP will slow to 6.5 per cent in 2016-17, and gradually recover to 7.5 per cent in 2017-18. It said the government is expected to increase public spending from the next fiscal year to offset the likely lingering impact of a slower growth in the informal economy.

Moreover, the RBI is also likely to keep monetary policy accommodative for a prolonged period, which will help private consumption to recover once again in the next fiscal year, especially in the second half, it said.

DBS Bank has warned of major downside risks to growth due to the demonetisation exercise, and has estimated that the gross value added can come down by up to 0.80 per cent lower than its 7.6 per cent target. “There are downside risks to the tune of 0.40-0.80 per cent to our gross-value added estimate of 7.6 per cent,” it said in a note.

Beyond the immediate policy issues of managing the cash crunch as best as possible and trying to mitigate the worst side-effects, it would be interesting to see what further steps the government will take to formalise the economy and structurally generate higher government revenues, Fitch said.

Deutsche Bank expects CPI inflation to average under 5 per cent both in 2016-17 and 2017-18, opening up considerable additional room for rate cuts.