Daily Management Review

As Demonetization Dents Economy, India Set for Slowest Growth Period


01/18/2017




As Demonetization Dents Economy, India Set for Slowest Growth Period
Societe Generale said that as the government's demonetization drive triggers a shortage of cash, India seems set for four consecutive quarters of sub-7 percent growth for the first time since at least 2011.
 
Amending the base year to 2011-2012 from 2004-2005, the way India counted its gross domestic product (GDP) numbers was amended in January 2015 by the country's Central Statistics Office.
 
According to Kunal Kumar Kundu, India economist at SocGen, India experienced three consecutive quarters of growth below 7 percent between December 2012 and June 2013 under this new series, which dates back to June 2011. For the first time growth will be below the 7 percent mark for four quarters in a row for the series if Kundu's forecasts turn out to be accurate.
 
Kundu said in a note that starting with the quarter that ended Dec. 31m a far lower growth rate than India would be comfortable with would be the result of a combination of crimped rural demand, falling capacity utilization and weakening business confidence.
 
From 7.3 percent previously, India's fiscal 2017 growth rate was slashed to 6.6 percent by SocGen. Down from an earlier projection of 7.7 percent, the bank expects growth to be 7.2 percent on-year for fiscal 2018, which ends March 2019.
 
"We also see the potential revival in already anemic private investment taking far longer than we originally anticipated," Kundu added. 
 
Impacting 86 percent of India's currency in circulation is the demonetization program in India which has been on for more than 50 days. The government has used newly printed 500 and 2,000 rupee notes to replace the recalled existing 500 ($7.35)and 1,000 ($14.70) rupee notes.
 
In line with consensus, the drastic slowdown in factory activity was reflected in the initial data released in the aftermath.
 
More room to cut rates would be available for the Reserve Bank of India due to subdued consumer prices, analysts reckon. SocGen estimates two rate cuts of 25 basis points each for 2017.
 
In the first 34 days since the demonetization program, a study by the All India Manufacturers' Organization (AIMO) showed that a 50 percent decline in revenue and 35 percent job losses were suffered by the micro and small scale industries and SocGen also pointed to this study. According to AIMO, those numbers could be as high as 60 percent drop in employment and 55 percent fall in revenue by March 2017. These industries usually are very reliant on cash transactions.
 
Various procedures aimed to cushion the blow from demonetization were introduced by Indian Prime Minister Narendra Modi  in his New Year's eve address. Special provisions for senior citizens, villagers, entrepreneurs and small businesses were included them.
 
"The very fact that Prime Minister Modi had to announce (systems of procedures) for certain sections of the population, is in itself a tacit admission that the effects of demonetization have been more painful than expected," said Kundu.
 
The household sector and consumption are India's main sources of protection against a slowdown and since there is expected to be a large number of job losses, those sectors could be highly stressed, he added.
 
However, growing at more than twice the global growth rate, India is set to remain one of the fastest growing major economies in the world even with the reduced growth projections. The way for longer term benefits as demonetization impact ebbs could be possible by India passing key reforms and follow-up actions to them and this is making some institutions bet on India.
 
(Source:www.cnbc.com) 






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