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The short-term adverse impact of the demonetisation move is being felt in the irregular heartbeat of the economy, which appears, from all available evidence, to be slowing down.
Both macroeconomic data projections and anecdotal evidence from the marketplace establish that the cash squeeze has dampened consumer sentiment and is proving a drag on GDP growth in this quarter. Sales of modern conveniences (mod-cons) have virtually stalled, and production targets are being scaled down in response.
In fact, analysts reckon that the growth slippage may prompt the RBI to advance an anticipated rate cut to December.
Fitch Ratings on Tuesday cut the GDP growth forecast for 2016-17 to 6.9 per cent from its earlier estimate of 7.4 per cent, noting that the demonetisation will impact economic activity in the October-December quarter.
“Economic activity will be hit in the fourth quarter of 2016 by the cash crunch created by withdrawal and replacement of bank notes that account for 86 per cent of the value of currency in circulation,” it said. Consumers have not had cash to complete purchases, it said, adding that the time spent in queuing up at banks is also likely to have affected general productivity. “The impact on GDP growth will increase the longer the disruption continues,” it warned.
Fitch also revised downward the growth forecast for 2017-18 and 2018-19 to 7.7 per cent from 8 per cent earlier.
In separate reports last week, Moody’s Investor Service and Standard and Poor’s, too, had warned of short-term economic disruption due to the demonetisation move.
Fitch noted, however, that the medium-term effect of the currency withdrawal on GDP growth was unlikely to be large. “Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 per cent hike in civil servants’ wages,” it said.
Still, the anticipated recovery in investment looks a bit less certain in the light of ongoing data weakness, it cautioned.
A DBS report, meanwhile, reasoned that the Reserve Bank may bring forward a rate cut to December to support growth and tap a favourable inflation outlook — although, in the analysts’ view, the first quarter of 2017 is a better time to ease rates, given the global uncertainties and rupee volatility.
The Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut the benchmark interest rates by 0.25 per cent to 6.25 per cent. The next RBI policy review is on December 7. The report noted that the demonetisation is expected to affect economic activity, especially consumption, supply chain and cash-dependent businesses, as well as inflation over this quarter and the next.
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