The Reserve Bank of India (RBI) has cut its GDP growth forecast for this financial year from 7.6% to 7.1%, citing the government’s demonetisation exercise that sucked out 86% of the currency in circulation.
Rating agencies and broking houses have also cut their estimates of India’s GDP growth for 2016-17 in anticipation of temporary disruption in economic activity during the October-December quarter because of the cash crunch since the recall of high-value banknotes a month ago.
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 cut growth estimate to 7.4% from 7.7% 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% 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%.
“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 has cut the country’s GDP estimate for 2016-17 to 3.5% from the previous 6.8%.
(with agency inputs)