Demonetisation Could Knock Off 1-3% From GDP Growth: Economists

The demonetisation of big currency notes is having a negative impact on demand as well as consumption side of the economy and India's gross domestic product (GDP) growth in the remaining two quarters of the year (October to March) could suffer, say analysts. However, most of the analysts remain positive on the long-term impact of demonetisation on the economy.

GDP growth rate could take a knock of around 1 per cent to 3 per cent (or 100 to 300 basis points), in the next two quarters, according to Pronab Sen, former chief statistician of India.

The demonetisation has impacted the entire informal sector, which accounts for about 45 per cent of the GDP and nearly 80 per cent of employment, he told NDTVProfit.com.

"Only on the basis of monetary impact of demonetisation we can expect the GDP to come down by 1 per cent and if we take into account the impact on production side due to credit crunch, the GDP can come down by up to 3 per cent," he said.

India's GDP growth in the first quarter (April-June) of this fiscal year slowed down to 7.1 per cent, from 7.5 per cent during the same quarter a year ago.  Before the announcement of demonetisation, International Monetary Fund had pegged India's GDP growth for 2016-17 at 7.6 per cent.

Mr Sen also pointed out that the on-going Rabi crop season could also be impacted from demonetisation. "For every hectare of land a farmer needs to invest Rs 6 lakh. This money sustains him for the next five months. But the demonetisation has led to destruction of the informal lending sector which can impact the sowing of Rabi crop," said Mr Sen.

The government has allowed farmers to draw up to Rs 25,000 per week against crop loans. But since majority of small farmers rely on informal system of money lending for their borrowing needs, the Rs 25,000 limit will not help them, according to Mr Sen.

It is estimated that the old Rs 500 and Rs 1000 notes accounted for about 85 per cent of the total currency in circulation and the government's decision to withdraw the legal tender of these notes from November 9 has created cash crunch in the market.According to RBI, the value of Rs 500 and Rs 1,000 currency notes in circulation was above Rs 14 lakh crore in March 2016.

Agricultural growth in India contracted 0.2 per cent in 2014-15 and grew by only 1.2 per cent in 2015-16 due to two consecutive droughts.

DK Joshi, chief economist at credit rating agency Crisil, also agrees on the negative impact of demonetisation on the GDP growth. "We are in the process of analysing the range in which Indian GDP will come down, but it will certainly be on the downside in the coming quarters," said Mr Joshi.

Madan Sabnavis, chief economist of Care Ratings, said that urban consumption demand will be hit in the short term. "The sales of consumer durables are getting affected due to the demonetisation and it will reflect in the current quarter's GDP growth," said Mr Sabnavis.

Mr Sabnavis estimates that demonetisation will take away 0.5 per cent from the GDP growth.

In a report released on Friday Care Ratings said " In general, services sector will be affected sharply in Q3 which cannot be recouped in Q4, though the intensity will reduce over the 7 month window ending December 31st."