Cash ban hits growth, says India
AFP
AFP, NEW DELHI: Indias government acknowledged that its decision to pull high-value bank notes from circulation has caused pain in large parts of the economy as it lowered its growth forecast on the eve of the budget.
Its annual economic survey concluded that the so-called demonetisation scheme had hit a host of sectors including real estate and farming but also said tax revenues could be boosted in the long-run.
The adverse impact of demonetisation on GDP (gross domestic product) growth will be transitional, said the survey compiled by the governments chief economic advisor Arvind Subramanian.
In the survey, the government lowered its growth forecast for the 2016-17 fiscal year ending in March to 7.1 per cent, down from 7.6 per cent in the previous year.
But the survey said the estimate was based mainly on data for the first seven to eight months of the financial year, before the shock move in November to pull all 500and 1,000 rupee notes from circulation.
That decision effectively removed around 86 per cent of the cash in circulation at one stroke, triggering massive queues outside banks as the authorities struggled to print enough new notes.
The survey said cash-intensive sectors such as agriculture, real estate and jewellery were the worst affected and that there had been job losses and a decline in farm incomes in the broader economy.
Growth slowed as demonetisation reduced demand... and increased uncertainty, said the survey.
Speaking at a press conference in Delhi, Subramanian said that there have been short-term costs which are real and significant.
I think there has been hardship and inconvenience especially for those in the informal sector but there is also potential for long-term benefits, he added.
Finance Minister Arun Jaitley said in the survey he expected cash supplies would be fully replenished by the end of March and the economy should then revert to normal, projecting growth in 2017-18 in the range of 6.75 to 7.5 per cent.
The cash crunch has already prompted the International Monetary Fund to knock a per centage point off its forecast for Indias economy in the current fiscal year to 6.6 per cent, bringing it below Chinas projected rate of 6.7 per cent.
Sunil Sinha, principal economist at India Ratings Research, said it was unusual for the government to give such a huge range in its growth projection.
The very fact that it has used such a huge range of 75 basis points means that there are a lot of gaps in terms of estimating the effects of demonetisation and it is quite obvious that the spillover effect will be felt in thenext fiscal year as well, he told AFP.
As a thumb rule, if such a wide corridor is given, one can expect growth to settle somewhere in the middle at best, assuming some of the positives play out.
However Sujan Hajra, chief economist at Anand Rathi Securities, said that the economic survey was considerably conservative and the final growth figure could be higher than 7.1 per cent. If you look at the corporate results for the third quarter, they were ahead of market expectations despite demonetisation, said Hajra.
The longer-term impact of demonetisation and introduction of GST should play out in the next year and help the GDP, Hajra added in reference to a long-delayed goods and services tax which should be rolled out laterthis year.
By painting demonetisation as a blitz on corruption and cash-hoarding that will ultimately boost tax revenues, Prime Minister Narendra Modi has so far escaped a major backlash.
While there were massive queues outside banks in the weeks afterwards, they have now subsided while limits on withdrawals have eased.
Indias central bank announced late Monday that it would loosen some of the restrictions on cash withdrawals although most savers are still only allowed to withdraw a maximum of 24,000 rupees in cash each week.
