Cash crunch to hit economic activity; GDP growth to fall

SNS, New Delhi November 19, 2016: The cash crunch following the scrapping of high value currency is likely to impact the GDP growth, experts say. The growth in 2017-18 is likely to fall to 5.8 per cent from an estimated 7.3 per cent as economic activity slows down after demonetisation.

“The way things are right now, economy will be under pressure and there will be an impact on the growth due to demonetisation. It will take at least 2-3 months for the economy to stabilise,” former RBI deputy governor KC Chakraborty said, pointing out that replacing old notes with new ones will take time.

A total of 14 lakh crore, 86 per cent of the value of the currency in circulation became useless after Nov 8 that led to a cash crunch and given current printing capacity it may take a few months to print replacement currency.

“Downturn has already set in with businesses getting adversely impacted. Small scale industries as well as big businesses and services have got hit. And now as the middle class postpones their purchases, the demand will decline further, impacting production and investments, resulting in low growth,” JNU Professor Arun Kumar said, adding that once the downturn sets in it takes it takes time to become normal.

According to a report from brokerage house Ambit Capital, from October-December 2016 until October-December 2019, Ambit Capital expects a strong 'formalisation effect' to play out. "We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we cut our FY18 GDP growth estimate to 5.8 percent from 7.3 percent," the report said.

The demonetisation move is expected to disrupt economic activity in the short term, especially those segments where cash-based transactions are the norm like real estate, unsecured lending, real estate construction services and building materials.

Half of the non-tax paying businesses in the informal sector that forms 40 per cent share will become unviable and cede market share to their organised sector counterparts, leading to low growth, the report states.

"While in the near-term, we expect these businesses to suffer, over the next couple of years the strongest players in these sectors will gain market share as competition from unorganised players reduces," the report adds.