Demonetisation: Credit agencies lowered India's FY 2016-17 GDP growth estimates predicting liquidity crunch in economy

Updated On : 08 Nov , 2017 , 07:32 PM
New Delhi:

Exactly a year ago on Nov 8th, 2016, the Prime Minister Narendra Modi announced the demonetisation of high denomination currency notes (Rs 1000 and Rs 500) with an aim to flush out black money from the economy and charter the path for a more transparent and cleaner economy. 

The Reserve Bank of India (RBI) had slashed its GDP growth forecast for FY 2017 from 7.6 percent  to 7.1 percent owing to the government’s note ban exercise that took out nearly 86 per cent of the currency in circulation.

Credit rating agencies and broking houses were immediate to react to government's economic measure and lowered estimates of India’s GDP growth for 2016-17 in anticipation of temporary fall in economic activity during the Oct-Dec quarter because of the liquidity crunch post the recall of high denomination banknotes a month ago.

The rating agencies feared that the cash crush will lead to a slump in consumer demand for goods in the economy and hence the circulation of money in the economy would be severely curtailed.

Here is a look at how the rating agencies revised the outlook of India's GDP post the Modi govt's announcment on demonetisation

Fitch Ratings

Fitch Ratings lowered India’s GDP growth forecast for this fiscal to 6.9% from 7.4%.

In its ‘Global Economic Outlook - November’ report on the currency ban, Fitch said consumers do not have 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.

“Time spent queuing in banks is also likely to have affected general productivity. The impact on GDP growth will increase the longer the disruption continues,” Fitch said, adding the medium-term effect of the currency withdrawal on GDP growth is uncertain, but is unlikely to be large.

Morgan Stanley

Morgan Stanley cut growth estimate to 7.4 percent from 7.7 per cent for 2016

For 2017, the growth forecast has been slashed to 7.6% from the earlier 7.8%. For 2018, the growth is pegged at 7.8%
“Though the overall growth story remains on track, the government’s recent decision to replace high-value currency is expected to affect near-term economic activity, thus leading to a slower pace of growth recovery,” Morgan Stanley said in a note.

Bank of America Merrill Lynch

In a research note, Bank of America Merrill Lynch also cut its growth forecast for India. “We see a 30 bps risk each to our 7.4% FY17 and 7.6 per cent FY18 growth forecasts with demonetisation set to hurt activity in December as well,” BoA said in a research note.

India Ratings and Research (Ind-Ra)

India Ratings and Research revised its growth forecast for 2016-17 to 6.8%, 100 basis points lower than its earlier projection of 7.8 per cent

“With the decline in cash holdings in the hands of the people and severe restriction in the flow of new cash, consumption demand has also fallen impacting both wholesale and retail sales.

Anecdotal evidence suggests that the cash squeeze has reduced sales in the informal sector by 30%-40% during the first fortnight following the de-legalisation,” it explained in a research note.

Ambit Capital

Ambit Capital cut the country’s GDP estimate for 2016-17 to 3.5% from the previous 6.8%.

First Published : Wednesday, November 08, 2017 07:20 PM

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