Daily Management Review

After Cash Crunch, Dramatic Slowdown in India’s Economic Growth Anticipated


12/02/2016




After Cash Crunch, Dramatic Slowdown in India’s Economic Growth Anticipated
Data that upholds its ranking as the world's fastest-growing economy have been revealed by India once again. But as a cash squeeze engineered by Prime Minister Narendra Modi's government looks set to hit growth in the coming quarters, the South Asian giant may not able to retain that title for long.
 
Official data revealed that there was an expansion of 7.3 percent in the Gross domestic product (GDP) in the July-September period, India's fiscal second quarter. The GDP growth rate in the previous quarter was a 15-month low and the figures of this quarter was an improvement from the previous quarter's 7.1 percent increase and this eclipsed China's 6.7 percent growth during the same period.
 
But that may be the last above-7 percent growth reading for some time to come.
 
"The improved growth is no cause for cheer going forward, since consumption, the main growth driver of the economy, will likely be the biggest casualty in the months ahead as demonetization takes its toll on overall consumption, especially in rural areas," Société Générale economist Kunal Kumar Kundu explained in note.
 
A nation-wide cash crunch amid a limited stock of script has been produced by a controversial plan to swap all 500 and 1,000 rupee notes — a combined 86 percent of currency in circulation—with new notes.
 
With a daily limit on the amount of old notes that can be exchanged, consumers are holding off from spending as cash is removed from the system as a result. The frugal mood can have weighty economic consequences as private consumption accounts for a whopping 60 percent of GDP.
 
Catching tax evaders holding undeclared cash, or "black money" is the aim of Modi’s program which was launched on Nov. 8. But so far, the program has resulting in nation-wide protests as it has mostly hit the lower income population segment, many of whom operate entirely on cash and lack bank accounts to exchange old notes.
 
"The sectors most concerning are the ones with a high reliance on cash transactions, which can range from daily foodstuffs to big-ticket items like jewelry and real-estate. So these sectors are likely to feel the crimp in demand over the near term," Shilan Shah, India economist at Capital Economics, told the media.
 
The spending hit isn't limited to just consumers, however.
 
Faraz Syed, associate economist at Moody's Analytics noted that liquidity shortages in business sectors will also contribute to the looming GDP slowdown. He said that firms will likely delay investment decisions and re-calibrate their working capital.
 
Moody's has now lowered its 2016-2017 growth forecast to 6.6 percent from 7.5 percent previously in anticipation that the demonetization effect will trickle down into the March and June quarters next year.
 
Sayed said that the central bank could be motivated to cut interest rates by 25 basis points at its scheduled meeting next week due to the falling growth combined with an expected drop in inflation, due to a healthy monsoon season and declining food prices.
 
While Capital Economics' Shah warned that India's growth data needs to be taken with a pinch of salt, he agrees the economy will set to take a beating in the upcoming quarter. "Demonetization aside, the other major caveat when it comes to India GDP is accuracy... The economy is likely growing a few percentage points slower than what official data suggests."
 
New Delhi's new GDP calculation method has made many skeptical after it was introduced in January 2015.
 
Shah noted that to gauge economic health, analysts and policymakers will look at alternative indicators, such as monthly manufacturing data until the government unveils more clarity on the methodology.
 
(Source:www.cnbc.com) 






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