The cash crunch caused by demonetisation and its impact on consumers and farmers could result in the Indian economy’s growth slowing down to 6.9 per cent this financial year, Fitch Ratings said on Tuesday, scaling down its earlier GDP growth estimate of 7.4 per cent.
The ratings agency also revised downwards its GDP growth forecast for 2017-18 to 7.7 per cent from 8 per cent. However, the report says although the medium-term effect of the currency withdrawal on GDP growth is uncertain, it is unlikely to be large, adding that the informal sector should recover soon.
“Economic activity will be hit in 4Q16 (September-December) by the cash crunch created by withdrawal and replacement of bank notes,” the report added.
“Fitch has revised its real GDP growth forecast down to 6.9 per cent in the financial year ending March 2017 (FY17), from 7.4 per cent in the September GEO (Global Economic Outlook).”
Productivity affected
“Due to the demonetisation, Indian consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season,” the Fitch Ratings report said.
“People who operate in the informal sector will still be able to use the new high-denomination bills and other options (such as gold) to store their wealth,” it said.
“There are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual.”
“Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, eg supported by an almost 24 per cent hike in civil servants’ wages,” the report added.
“But the anticipated recovery in investment looks a bit less certain in light of ongoing weakness in the data,” the report stated.
