Experts fear demonetisation may cause economic slowdown

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The much-hyped and bold demonetisation move of the Modi government might have been hailed by the experts initially, but according to some leading brokerage houses and the economists, India could soon be staring at the slowdown owing to the cash crisis created by replacement of the Rs 500 and Rs 1,000 bank notes.

HSBC has said that the success of the demonetisation move relies on the follow-up reforms that the government will undertake in the coming months. According to it, in the short run, withdrawal and replacement of the high- denomination currency notes will bring some benefits like the initial growth capital but there will also be some losses. It has also cautioned that the country’s economic growth could fall by 0.7-1 percentage points in the two coming quarters owing to tightening liquidity.

The brokerage house, Ambit Capital, has cut its GDP growth estimate for 2016-17 by 330 basis points to 3.5 per cent from 6.8 per cent. The report has also projected that the second half of this financial year will witness a GDP growth of not more than 0.5 per cent. In a cautionary note, it also added that demonetisation could challenge the viability of the small businesses in the informal sector and affect the existing funding process.

Singapore based DBS too spoke about the major downside risks to India’s growth reckoning that the gross value added can fall by up to 0.8 per cent from its target of 7.6 per cent. It also added that there could be a considerable impact on consumer goods and discretionary spending for the coming two quarters.

Similarly, Care Ratings too projected GDP growth to be impacted by 0.3-0.5 per cent, adding that the services and the manufacturing sectors would be the biggest casualties. Fitch Ratings has further warned that the early positive effects of demonetisation won’t be strong enough to support credit profiles.

Former Planning Commission Deputy Chairman Montek Singh Ahluwalia too was guarded in his comment on demonetisation and added that the move from the ruling government could drag down the GDP growth by 1-2 percentage points, affecting both consumption and production.

However, some experts were able to see the silver lining. Aditya Puri, MD of HDFC Bank, called demonetisation a “necessity”. He stressed on the long-term benefits of the move, adding that it would broaden the tax-base, lead to rate cuts and eradicate counterfeit notes.