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 take a hit According to a report by Ambit Capital, GDP growth is likely to decelerate from 6.4 percent in first half of this fiscal to 0.5 percent in the second […]

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

Reuters

From October-December 2016 until October-December 2019, Ambit Capital expects a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40 percent share in GDP) become unviable and cede market share to their organised sector counterparts.

“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 percent (from 7.3 percent),” the report said.

The demonetisation move is expected to disrupt economic activity in the short term, especially those segments where cash-based transactions are the norm like real estate, unsecured lending, real estate construction services and building materials.

“Whilst in the near-term, we expect these businesses to suffer, over the next couple of years the strongest players in these sectors will gain market share as competition from unscrupulous/unorganised players reduces,” the report added.

A report by Care Ratings titled ‘Impact of demonetisation on GDP growth in FY17’, said, the services sector is expected to be affected the most in these economic activities. Importantly, these losses, due to their inherent nature, can’t be recovered in the next quarter. For rest of manufacturing, demand side issues would exist till such times conditions stabilize and could get reversed in Q4. Hence, Industry is also expected to be impacted which will be more significant in the first 2-3 weeks post the announcement.

While consumer goods’ companies are also feeling the impact right now, with tight liquidity in the markets, the demand is likely to come back by next quarter. “Losses incurred would be recovered in the next quarter, particularly for consumer goods where there would be only deferment of purchase.

Even the SMEs industry will have a major problem in adjusting production schedules as both payments and receipts flow in cash given their structures.

According to the Care Ratings’ report, as per initial estimate, overall GDP growth would be affected by 0.3-0.5 percent.

“As a response to the slowing GDP growth, we expect the RBI to consider rate cuts of 25-50 bps over the second half of FY17 itself,” the Ambit said.

The Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut benchmark interest rates by 0.25 percent to 6.25 percent. The next RBI policy review is on 7 December.

Foreign brokerage Bank of America-Merrill Lynch sees the demonetisation exercise impacting the country’s growth in the next two quarters, and estimates GDP to fall by 50 basis points.

“The economy has had a heart attack this quarter. We expect the impact of this to resonate for at least two quarters, impacting GDP by 50 basis points for the fiscal year,” The Economic Times report said quoting Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch.

Rating agency ICRA has cut GDP forecast by 40 basis points, while HDFC Bank trimmed growth estimates to 7.3 percent from 7.8 percent earlier. Another credit rating firm Crisil, which earlier estimated GDP growth at 7.5 percent, now sees downside risk from the demonetisation move.

In between:

Congress leader P Chidambaram on Saturday attacked the Narendra Modi government for obliterating everything about India before it came to power and said it believes there was no civilisation prior to that.

P Chidambaram. PTI

“As far as the present government is concerned, India began, civilisation began only on May 26, 2014,” Chidambaram said at the Tatas-run Mumbai LitFest today while addressing a panel discussion on Banking for the bottom billion.

The former finance minister was referring to the NDA government not adding the 13 crore no-frills accounts, opened during the UPA regime, with the Jan Dhan ones that were opened during the present government’s financial inclusion drive.

While the UPA government had opened these accounts between 2004 and 2014 under its financial inclusion drive,Prime Minister Modi had relaunched this under the Pradhan Mantri Jan Dhan Yojana on 28 August 2014, under which around 25.51 crore accounts have been opened so far.

Chidambaram noted that as many as 13 crore no-frills accounts were opened under the UPA rule, but are blacked outnow.

“These 13 crore accounts which we opened between 2004 and 2014, under the guidance of C Rangarajan, as far as the (present) government is concerned, they don’t exist, they are blacked out,” he said, adding that “Jan Dhan is only another name for no-frills accounts”.

The Congress leader praised the government’s efforts for this financial inclusion drive, but said by simply opening an account, one’s behaviour can’t be changed.

“People must have money to deposit in the account, they must have a need to borrow from that account, otherwise account will remain dormant.

“So, how does our bankers jugaad sense work? The government pulls them up for saying dormant accounts, they put one rupee from their pockets in those accounts,” he said.

Earlier in the day, he had said the after-effects of the demonetisation will last longer than expected as it was carried out without much thinking and he also doubted if the government had consulted its Chief Economic Advisor Arvind Subramanian on this before taking the decision.

“You are seeing the first-order effect of withdrawing, sucking out 86 percent of the currency in circulation from the market. The first order will continue for several weeks now. Then, you will see the second-order effect,” he said.

“My suspicion is the only knowledgeable economist in the government Arvind Subramanian was not consulted,” he said.

source:

via The cash crunch may paralyse economic activities in India — Arrested Developments

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