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Business News/ Politics / Policy/  Demonetisation effect: economic growth seen slowing to 6.1% in December quarter
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Demonetisation effect: economic growth seen slowing to 6.1% in December quarter

Economists see GDP growth in three months to December to be in range of 5.5% to 6.5%, against 7.2% growth recorded in the year-ago quarter

The government will release GDP growth numbers for the December quarter on Tuesday, providing clues on how the economy has responded to the government decision to outlaw high-value banknotes in November. Photo: AFPPremium
The government will release GDP growth numbers for the December quarter on Tuesday, providing clues on how the economy has responded to the government decision to outlaw high-value banknotes in November. Photo: AFP

New Delhi: India’s economic growth may slow to 6.1% in the fiscal third quarter because of the government’s disruptive move to ban cash, according to the median of five estimates by economists.

Economists surveyed by Mint expect growth in gross domestic product (GDP) in the three months ended 31 December to be in the range of 5.5% to 6.5%. That compares with the 7.2% growth recorded in the year-ago quarter.

The government will release GDP growth numbers for the December quarter on Tuesday, providing clues on how the economy has responded to the government decision to outlaw high-value banknotes in November.

The first advance growth estimates for 2016-17, released by the Central Statistics Office (CSO) on 6 January, did not capture the impact of demonetisation. Though CSO projected that India’s GDP growth would slow to 7.1% in the year ending 31 March from 7.6% in 2015-16, on account of a slowdown in manufacturing, most of the data used was only till October, before the currency exchange was announced on 8 November.

A sharply lower third-quarter GDP number will also lead to a cut in the full-year growth forecast.

Prime Minister Narendra Modi’s decision to invalidate high-value currency, amounting to 86% of the value of cash in circulation, led to a severe cash crunch, disrupting supply chains and crimping demand for goods.

International rating agencies and multilateral institutions have cut India’s growth projections for 2016-17 to below 7% in response. India’s economy had grown at 7.1% and 7.3% in the first quarter and second quarter of 2016-17, respectively.

A Reuters poll of economists estimated that the economy will grow at 6.4% in the October-December quarter.

“We expect the third quarter GDP growth to be around 6% due to a dip in various economic indicators. The inflation numbers fell more than what was anticipated in the month of November and December partly due to the impact of demonetisation," said Sunil Kumar Sinha, principal economist and director, India Ratings and Research.

India’s factory output contracted 0.4% in December after growing a robust 5.7% in November.

Madan Sabnavis, chief economist of Care Ratings expects third-quarter GDP growth to be around 5.5% because of demonetisation.

Economists expect the slowdown in industrial and services growth to be offset by healthy growth in the agriculture sector growth even as the official GDP number is likely to underestimate the effect of demonetisation because the calculations do not adequately capture the impact of the note ban on the informal sector, which was the worst hit.

The cash crunch will selectively affect some of the sub-sectors of industry and services, though a robust kharif output will help the agriculture sector register a turnaround by growing at 5% from a contraction of 1% in the year-ago period, said Aditi Nayar, principal economist at rating agency Icra Ltd.

“Since the early estimates of quarterly gross value addition (GVA) would rely heavily on available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the first estimates of third quarter of financial year 2017 GVA growth may not fully capture the impact of the note ban. Subsequent estimates that draw from wider data sources, may well revise third quarter of financial year 2017 growth downward," Nayar added in a 20 February note.

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Published: 27 Feb 2017, 12:34 AM IST
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