Chilled by demonetisation, India to take cold comfort from strong GDP

Narendra Modi expects the cash situation to become normal by end-December, but critics say he is being over-optimistic.

By: Reuters | New Delhi | Updated: November 30, 2016 12:10 pm
narendra modi, demonetisation, india GDP, black money, old Rs 500 note, old Rs 1000 note, currency crisis, september quarter GDP, india GDP rate FILE – In this Nov. 16, 2016 file photo, a man holds a charred facsimile of the discontinued currency 500 note after a protest by a traders association demanding adequate arrangement to exchange discontinued currency notes outside Reserve Bank of India in Kolkata (AP Photo/Bikas Das, File)

India can ill-afford to take much pride in having the world’s fastest growing large economy when it releases September quarter data on Wednesday, with businesses, farmers and families all suffering after the government’s sudden demonetisation drive.

Having taken credit for putting life back in a moribund economy when he took power 2-1/2 years ago, Prime Minister Narendra Modi’s crackdown on tax dodgers and counterfeiters by removing 500 rupee and 1,000 rupee banknotes from circulation has taken the economy down a very bumpy road.

How bumpy depends on who’s talking, but almost everyone agrees the drag on growth is likely to last through next year.

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“The move will weigh on GDP growth for a few quarters, dampening government revenues,” warned credit ratings firm Moody’s Investors Service. “The decline in economic activity will lower corporate sales volumes and cash flows.”

The quarterly gross domestic product data released on Wednesday won’t show the ill-effects. July-September will be the last quarter before the impact is felt from Modi’s bold and risky move this month to force people to deposit their hidden cash in banks, making it easy for the taxman to see.

The median estimate from a Reuters poll showed economists expect economic growth accelerated to 7.5 percent in the September quarter from 7.1 percent in the June quarter.

That’s not as fast as the 7.9 percent posted in the March quarter, but it had recovered momentum, and might have gone higher until Modi launched his attack on the so-called “black economy”.

While Modi has been praised for his intentions, people are wringing their hands over the cost of taking 86 percent of the country’s banknotes out of circulation virtually overnight.

The most optimistic forecasts suggest that India will finish this fiscal year in March with a respectable, but slightly lower growth rate of 7.3 percent.

But the most pessimistic forecast, from Mumbai-based brokerage Ambit Capital, for a precipitous drop to 3.5 percent growth shows just how worried people are.

KNOCK-ON EFFECTS

With a small stock of smaller notes available and new bills of 500 and 2,000 rupee in short supply, Indians had to stand in snaking queues outside banks and cash machines to change their old notes.

The better off may have more money to change, but for the mass of Indian’s living on the margins the disruption and loss of earnings has caused real hardship.

Modi expects the cash situation to become normal by end-December, but critics say he is being over-optimistic.

Meantime, consumers are spending less, which is hurting small producers who, in turn, are being forced to scale back their activities.

As a consequence, supply chains at small, medium and even larger companies are breaking down. Trucks are stranded with no money for fuel, workers won’t load goods for free, and distributors can’t pay up. Wholesale markets in many cities are shut.

The cash crunch has jeopardised production of key commodities and hurt rural communities – just recovering after two years of drought – as farmers lack cash to buy seeds and fertiliser. As a result, the area under cultivation for India’s winter crop has declined.

CMIE, an economic think tank, reckons the big banknote swap would cost at least $19 billion by the end of 2016 in foregone wages, lost business, and higher administrative expenses alone.

The liquidity shortage will retard efforts to revive private investment that has been plagued by weak external demand and a slow recovery in domestic demand.

And, despite the high economic growth rates seen over the past year-and-a-half, factories’ capacity utilization ratio remains stuck near their lowest level since 2009.

“Given that the growth recovery has still not taken full hold, the impact of this demonetisation … could delay the private corporate capex recovery,” analysts at Morgan Stanley wrote in a note, adding that they don’t expect that recovery to happen before 2018.

At least the potential for lower inflation holds out some hope that the Reserve Bank of India will extend its easing cycle with a quick interest rate cut.

“The central bank might prefer to bring forward the rate cut to December to support growth and tap the favourable inflation outlook,” said Radhika Rao, an economist with DBS Bank.

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  1. H
    Harikrishnan
    Nov 30, 2016 at 8:25 am
    The article is filled by "experts" and "think tanks" who seems to have no idea on the implication of this. What has been done in India has precedence in the world and there are no bench marks available to compare. GDP could fluctuate due to 100s of reasons including demonetization. the government also have implemented with a general planning and day to day issues are being addressed as and when it is come. The fact remains that nobody have starved to death in India because of this nor lack of payment of wages which they are eligible. So what is all these protests all about? It has definitely hurt all political parties including BJP. To start the cleansing in India, somebody have to be tough with the right intentions. Modi is doing that and surprisingly people seems to support him.
    Reply
    1. S
      Shekar
      Nov 30, 2016 at 9:39 am
      You illiterate don't seem to know anything of Indian politics. Get your statistics before you speak. It makes no sense to educate blind people like you. India under BJP would go down the drain..
      Reply
      1. A
        ashok s
        Nov 30, 2016 at 4:36 am
        At the end of the day if govt fails , it will incurr a loss of approx 4 trillion in taxes . each year govt collect 14 trillion taxes in various forms . if economy nose drives the loss will minimum of 4 trillion for fy 16-17
        Reply
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          ashok s
          Nov 30, 2016 at 4:33 am
          Banks can revolt against govt as they stand to loose 35000 cr in process of demonetization by virtue of interest payments to clients . will stake holder of such banks will bear the loss or customers or govt gives them some relief
          Reply
          1. A
            ashok s
            Nov 30, 2016 at 4:27 am
            Govt did ber , they killed the cat which was making fears among the rats ,so that they don't disrupt the fields. Now rats are having buffet .
            Reply
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              ashok s
              Nov 30, 2016 at 4:40 am
              If process of demonetization was secretive or leaked , on both occasions govt looses ground . if was secretive then RBI governor compromised and if leaked then minister s involved.
              Reply
              1. A
                ashok s
                Nov 30, 2016 at 4:30 am
                Now with ping of money bill in hush hush govt proved themselves wrong . their expectations of windfall profits thru RBI dividend has zero out. Now they ate at mercy of 50-50 scheme , this hardly will give them half a trillion in taxes which will equate lesser than cost of printing and banks interest loss
                Reply
                1. A
                  ashok s
                  Nov 30, 2016 at 4:38 am
                  What was use of such scheme when almost all the money is back in system or will be inn in immediate future.
                  Reply
                  1. A
                    atul
                    Nov 30, 2016 at 8:34 am
                    Mr Gupt Rooge and Blind Bakht of Impotent Feku G who left his wife 35 years and doing nation building. RSS chaddi walas are hideen terrorist with master mind Amit Shah and Mohan Bhagwat. These rascals BJPEE walas And RSS did not exist during freedom struggle now becoming champions of DeshBakhti. Say Loudly Bharat Mata Jee Pita Jee Baba Ramdev Jee Arnab Gosawami Jee Ke Maa ke Jayee
                    Reply
                    1. D
                      disgusted
                      Nov 30, 2016 at 4:48 am
                      50% Income tax on undisclosed income 25% money locked in for 3 years
                      Reply
                      1. S
                        Sreenivasan
                        Nov 30, 2016 at 8:35 am
                        Fresh news in today's paper is some 80000 crores is lined up for declaration as Non Performing ets with various public sector banks. A few lakhs of this may be of small businessmen who have done business upto 5 crore per annum. Rest all are of the big sharks who enjoy the largesse of the government - how can they donate you heavily at the time of elections otherwise ? lt;br/gt;lt;br/gt;Another news today is that half of the FDIs came into India in 2015 have been pulled back to their original destination. Reason - no hope for higher profit.lt;br/gt;lt;br/gt;Government will have to print a lot of counterfeit notes for our own consumption if the scenario is so encouraging.
                        Reply
                        1. j
                          jaihind101
                          Nov 30, 2016 at 4:12 am
                          economy is going to benefit from demonetisation
                          Reply
                          1. J
                            Jay Singh
                            Nov 30, 2016 at 4:55 pm
                            This comment got through but my decent comments are being moderated. Shame on you IndianExpress
                            Reply
                            1. V
                              Vinay
                              Nov 30, 2016 at 5:13 am
                              No Brother that is the logic if you have that kind of understanding.
                              Reply
                              1. K
                                Karuna Chakma
                                Nov 30, 2016 at 8:38 am
                                This morning I heard Amartya Sen explaining capitalism from Adam Smith. Please give a break to poor Modi and Jaitley a break - it is beyond their comprehension. They will destroy India.
                                Reply
                                1. K
                                  karthikeyan
                                  Nov 30, 2016 at 6:00 am
                                  Why not you give the correct figure? BJP office did not give you ??? or what ????
                                  Reply
                                  1. L
                                    Lead
                                    Dec 1, 2016 at 1:43 am
                                    8#ench0d0n ko G@nd dhone ki akkal nahi hai aur economics aur finance seekhane chale hain. lt;br/gt;Having lead Amartya sen as his team lead in the past I can confirm that he did not get nobel for inventing a new way of doing economics, he got it for gathering data to prove only 1 of the 1000s of theories of economics. He definitely is not the yardstick to measure or analyze the economy. lt;br/gt;All these fools like karuna, sreenivasan, ramved, etc need to go back to college before they spread such gibberish in the name of economic analysis.
                                    Reply
                                    1. M
                                      manikantan
                                      Nov 30, 2016 at 4:36 am
                                      Any figures. Even the Pm does not know but Bhakts speak as if they know. Not a single economist has been consulted before the move
                                      Reply
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                                        manikantan
                                        Nov 30, 2016 at 4:37 am
                                        Useless to speak to bhakts. Humanity is the collateral damage of this move.
                                        Reply
                                        1. M
                                          Manzoor
                                          Nov 30, 2016 at 6:53 am
                                          Demonetisation is not a fight against black money but something else because as per government data (for last years), cash component of total black money is 6-8% only.
                                          Reply
                                          1. M
                                            mast kalandar
                                            Nov 30, 2016 at 4:53 am
                                            All the money is NOT back in systems brother!!! atleast 4-5 laks crore will never return to system, which RBI will transfer as a PROFIT to the govt....OR, unless the Tax Evaders pay the self disclosed 50% tax or govt raids and fleeces 85% tax. So either way a win win situation for the govt.
                                            Reply
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