Rating agencies and analysts have started downgrading India’s growth outlook as consumption and cash-based transactions are being severely hit across the country in the wake of the withdrawal of Rs 500 and Rs 1,000 notes.
Rating agency ICRA expects growth of Indian gross value added (GVA) at basic prices to print at 7.2 per cent in the second quarter of FY2017, mildly lower than the pace in Q2 of FY2016. With demonetisation temporarily impacting economic activity, the rating agency has revised its forecasts for growth of GDP and GVA in FY2016-17 downward by 40 bps each to 7.5 per cent and 7.3 per cent, respectively.
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Aditi Nayar, Senior Economist, ICRA Limited, said: “ICRA expects the boost to agriculture and allied activities from a near-normal monsoon to be neutralised by a decline in the growth of industry and services in the second quarter. Accordingly, the pace of expansion of GVA at basic prices is expected to ease mildly to 7.2 per cent in Q2 of FY2017 from 7.3 per cent each in Q2 FY2016 and Q1 FY2017.”
CARE Ratings said, “under the conservative approach GVA will grow by 7.3 per cent which is 0.3 per cent less than what was projected. Under the aggressive approach, GVA will slow down to 7.1 per cent which is 0.5 per cent lower than the initial estimate.” Assuming that the transition from GVA to GDP would remain unchanged at 0.2 per cent (i.e. GVA 7.6 and GDP 7.8 per cent) as per initial estimate, overall GDP growth would be affected by 0.3-0.5 per cent.
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 today, nearly a fortnight after the government demonetised the Rs 500 and Rs 1,000 banknotes.
This projection, however, is conservative as many brokerages have already projected even a 50 per cent dip in GDP growth, with Ambit Capital being the steepest at 3.6 per cent.
DBS said there will be some pent-up demand which can give an upside to growth starting the first quarter of the next fiscal. By acting on the demand side, the demonetisation move can help reduce inflation by up to 0.20 per cent over the next few months and make the case for a 0.25 per cent rate cut from the RBI in first half of 2017 stronger, DBS said, adding there will not be a rate cut in the December 6 policy announcement.
“Anecdotal evidence suggests that consumers are opting for minimal discretionary purchases. Consumption-oriented sectors, particularly those which involved a sizeable magnitude of cash transactions, such as real estate, construction, jewellery, retail, travel and tourism and trade are likely to experience a lull in the immediate term. Cash-based transactions in the unorganised sector would also get disrupted, particularly in rural areas,” Nayar said.
ICRA said the pace of growth of agriculture, forestry and fishing is likely to improve considerably to 5.0 per cent in Q2 FY2017 from 2.0 per cent in Q2 FY2016.
“A point to note is that some of the losses in GDP incurred in these 7 weeks (under Q3) will be recovered in the next quarter, particularly for consumer goods ..,” Care Ratings said.