Modi’s demonetisation seen tripping up India’s accelerating economy

Analysts cut forecasts for growth to 7.4% from 7.7% as Narendra Modi’s cash clean drive dents demand in an economy where 98% of consumer payments are in cash


By some estimates, the Modi government may need until May to replace the 23 billion banknotes it has sucked out. Photo: Ramesh Pathania/Mint
By some estimates, the Modi government may need until May to replace the 23 billion banknotes it has sucked out. Photo: Ramesh Pathania/Mint

Mumbai/New Delhi: Rather than highlighting how far India’s economy has come under Prime Minister Narendra Modi’s pro-growth administration, Wednesday’s gross domestic product report will underscore just how much there is to lose from his shock clampdown on cash.

Expansion probably accelerated to 7.5% in July-September, according to the median of 25 estimates in a Bloomberg survey of economists. However, analysts are cutting forecasts for growth to 7.4% from 7.7% for the year through March as Modi’s 8 November move to invalidate 86% of currency in circulation dents demand in an economy where 98% of consumer payments are in cash.

“Attention has shifted to the impact of the demonetisation initiative on the real economy,” Radhika Rao, an economist at DBS Bank Ltd in Singapore, wrote in a report on Monday. Growth in October-December could dip below 6%, she said.

Such a slowdown would imperil India’s position as the world’s fastest-growing major economy. A bigger concern, though, is how soon the $2 trillion market can fully rebound from the effects of Modi’s measure.

“Macroeconomic effects of the cash crunch include a temporary delay of consumption and investment, disrupted supply chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues,” said Thomas Rookmaaker, director in Fitch Ratings’s Asia-Pacific Sovereigns Group. “The impact on GDP growth is clearly going to be negative in the short run and depends to a large extent on how long the cash crunch is going to take.”

By some estimates, Modi may need until May to replace the 23 billion bank notes he’s sucked out. Others, such as Morgan Stanley’s Chetan Ahya, estimate that about 98% of cash required for transactions will be in the system by mid-December. That means consumption -- which accounts for 60% of GDP -- will recover from the April-June quarter though private investment will take time to improve, he said.

Following Wednesday’s GDP data, which is due at 5:30 pm in New Delhi, attention will shift to a purchasing managers’ index due Thursday that will offer a first assessment of the impact on manufacturing. Services PMI is due 5 December and the central bank will review interest rates 7 December.

Governor Urjit Patel will probably reduce the benchmark repurchase rate to 6% from 6.25% to arrest negative spillovers from the shock, according to Citigroup Inc. A private index compiled by BSE Ltd and the Centre for Monitoring Indian Economy signalled a sharp surge in urban unemployment this month, as reports poured in of construction supervisors unable to pay their daily-wage labourers.

The Reserve Bank of India’s decision will be a “close call,” Citigroup economists Samiran Chakraborty and Anurag Jha wrote in a report on Sunday. “In an uncertain economic environment since the demonetization exercise, the December monetary policy has to focus on a prudent risk management approach rather than a simple growth-inflation trade-off.” Bloomberg

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