Demonetization to impact GDP

The scrapping of Rs.500 and Rs.1,000 notes, which comprised about 86% of all cash in circulation, will put a dent in India's growth.  The most pessimistic view would possibly see India slipping back behind China and losing its title of fastest growing major economy in the world.
Brace for a slowdown in the remaining five months of FY17 as demand dries up in response to the lack of liquidity, but expect an equally strong rebound in a few quarters when the expected benefits of the move kick in, was the predominant view among analysts.
Most put the revised number at around 7% against earlier estimates of near 8%, an optimism that had been bolstered by good monsoons and a pay commission-led consumption boost. The Indian economy expanded 7.6% in FY16. The International Monetary Fund had put FY17 growth at the same level.China is likely to grow at 6.6% in 2016 and is expected to slow to 6.2% in 2017.
HDFC Bank expects India's GDP to grow at 7.3% versus the earlier estimate of 7.8%. CARE Ratings slashed its projection for gross value added (GVA) to 7.1-7.3% from 7.6%. Services will get hit the most in the December quarter on account of losses in trade, hotels and transport due to the volume of cash transactions involved in these activities.
ICRA cut its growth forecast by 40 basis points. It had earlier forecast GDP and GVA to grow 7.9% and 7.7%, respectively.
Investment bank Ambit Capital took a far bleaker view. It cut GDP growth estimates for FY17 to 3.5% from 6.8% earlier and for FY18 to 5.8% from 7.3%, even penciling in the possibility of a contraction in the ongoing third quarter.
Ambit said the cash crunch will paralyse economic activity in the short term.
An economist at one of the large private Indian banks said GVA growth could be as low as 7.1% with discretionary consumption to suffer a major blow due to the cash crunch.
Credit ratings firm Crisil earlier projected GDP to grow 7.5% but now expects a downside risk emanating from demonetisation.
HSBC expects an impact of up to one percentage point on growth.
Economic Affairs Secretary Shaktikanta Das said it was too early to assess the impact of demonetisation.
The deceleration will push the government's ambitions of achieving 8% growth further out of reach.
Sen Gupta said the economy can at best grow at the same pace as last year, though it is more likely it will grow somewhere around 7.4%, slower than the 7.6% registered in the fiscal year ended March 2016. The biggest blow will be borne by services sector as people conserve cash rather than spend on travel, consumption or leisure activities.

While the short-term view is negative, most experts have a bullish view a year down the line from the boost to taxes and potentially lower interest rates and inflation.Ambit expects a 25-50 basis point reduction in interest rates in the second half of the current fiscal.

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