Demonetisation: Modi's move put India's GDP at stake

India's economic growth is expected to fall by up to 1% points over the next 12 months in the wake of demonetisation, says HSBC.

Demonetisation: Modi's move put India's GDP at stake
The cash crunch arising out of demonetisation is expected to paralyse economic activity in the short-term. Photo: IANS
By ZeeBiz WebTeam
Updated: Thu, Nov 24, 2016
02:20 pm
Mumbai, ZeeBiz WebDesk
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Prime Minister Narendra Modi's surprise move to ban high denomination currency, which accounts for nearly 86% of all outstanding notes, has affected all the sectors including country's Gross Domestic Product (GDP).

Till now, the experts foresees a significant drop in the GDP. Here's what they have said:

CARE Ratings

The rating agency said that Modi's 50-day shock-and-awe treatment to tackle shadow economy and tax non-compliance may lead to a 0.5% drop in India's gross domestic product (GDP). 

India's total GVA is expected to drop between Rs 33,039 crore to Rs 54,227 crore for the year ending March 31, 2017 as against a pre-demonetisation estimate of Rs 1,04,27,191 crore.

HSBC

India's economic growth is expected to fall by up to 1% points over the next 12 months in the wake of demonetisation, while longer-term gains will depend on follow-up reforms, says a HSBC report.

"Using the cash elasticity of GDP, we estimate that over a year, economic growth can fall by 0.7-1% points, with the maximum impact in the immediate two quarters, which will see a large contraction in 'effective' money supply," HSBC said in a research note.

Ambit Capital

The cash crunch arising out of demonetisation is expected to paralyse economic activity in the short-term, and the 2017-18 GDP growth is likely to be 5.8 %, says a report.

According to Ambit Capital, GDP growth is likely to decelerate from 6.4% in first half of this fiscal to 0.5% in the second half with a distinct possibility of GDP growth contracting in third quarter of this fiscal.

"We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we cut our FY18 GDP growth estimate to 5.8% (from 7.3%)," the report said.

Fitch Ratings

Fitch Ratings in its report said that the ban notes, which accounted for 86% of the value of currency in circulation, has created cash crunch and is holding back economic activity. 

the rating agency believes that its impact on Gross Domestic Product (GDP) growth will increase, if the disruption continues. Having mentioned that, the agency said it will revise down their GDP forecasts.

Former Prime Minister Manmohan Singh

Manmohan Singh, was speaking at the ongoing Winter Parliament Session in Rajya Sabha, said that the demonetisation move can hurt India's GDP by 200 basis points.

"Those who say demonetisation is good in the long run should recall quote 'In the long run we are all dead', Singh said.

ICRA

Indian economy is expected to slow by at least 40 bps to 7.5 per cent for the full financial year due to the demonetisation drive, which is likely to create a lull in consumption-oriented sectors in the short term, rating agency Icra said, as reported by PTI.

“Based on our current assessment of the likely impact of demonetisation, we expect full year GDP and GVA (gross value added) to be 40 bps lower than our earlier forecasts of 7.9 per cent and 7.7 per cent, respectively, which presumes economic activity would resume normalcy in the fourth quarter of 2016-17,” Icra Senior Economist Aditi Nayar said in a report.

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