Demonetisation Effect: Gross Value Added To Fall By Up To 80 Basis Points, Says DBS

Mumbai: Singaporean brokerage DBS has warned of major downside risks to growth due to the demonetisation exercise, and has estimated that the gross value added can come down by up to 0.80 per cent lower than its 7.6 per cent target.

"There are downside risks to the tune of 0.40-0.80 per cent to our gross-value added estimate of 7.6 per cent," it said in a note on Monday, nearly a fortnight after the government demonetised the Rs 500 and Rs 1,000 bank notes.

This projection, however, is very meagre as many brokerages have already projected even a 50 per cent dip in GDP growth, with Ambit Capital being the steepest at 3.6 per cent.

The brokerage said there will be an impact on consumer goods and discretionary spending for at least two quarters, which will impact growth till March 2017.

Cash dependent businesses will be hit the most during this period and rural demand, especially from the unbanked sections, may also moderate, it added.

It, however, said there will be some pent-up demand which can give an upside to growth starting the first quarter of the next fiscal year.

By acting on the demand side, the demonetisation move can help reduce inflation by up to 0.20 per cent over the next few months and make the case for a 0.25 per cent rate cut from the Reserve Bank of India (RBI) in the first half of 2017 stronger, the brokerage said, adding that there will not be a rate cut in the December 6 policy announcement.

On the fiscal side, there will be "windfall gains" if the move results in unearthing unaccountable money from the system and will help to increase the proportion of direct tax revenues over indirect collections, it said. But it did not quantify the fiscal gains.

The brokerage was, however, quick to add that the estimates on black money vary widely and there is a  risk of overestimation in this assumption.

It also said a slowdown in the passage of other key reforms including the goods and services tax (GST) in the ongoing winter session of Parliament is being hampered by the bank note reforms.

On November 8, Prime Minister Narendra Modi had announced discontinuation of Rs 500 and Rs 1,000 notes.