Citi, HSBC slash India’s GDP growth projections

New Delhi/Mumbai: Global brokerage Citigroup has lowered India's growth forecast to 6.8 per cent for this fiscal from 7.2 per cent earlier, as cash crunch has affected pick-up in consumption while uncertainty around demonetisation may further delay any recovery in private investments.

“Almost two months after the demonetisation decision was announced, there are early indications of the negative shock to growth,” Citigroup said. It further said that the pick-up in consumption growth (both rural and urban), which was likely in the last two quarters of 2016-17, has not materialised because of cash crunch.

Moreover, investment growth was very sluggish even in the second quarter and the uncertainty around demonetisation could further delay any recovery in private investment.

“This could drag down 2016-17 GDP growth to 6.8 per cent, versus our previous forecast of 7.2 per cent,” Citigroup said. The report, however, noted that there is not enough evidence of structural damage from demonetisation and 2017-18 GDP growth could be 7.5 per cent.

“We do not think that there is enough evidence as yet to suggest that demonetisation exercise has damaged India's structural growth story and expect GDP growth at 7.5 per cent for 2017-18 on a low base of 2016-17,” Citigroup said.

Lower interest rates and more funds with banks are positive signals for economic recovery when the uncertainty around the demonetisation impact fades. “Also, we expect a more stimulating fiscal policy to counter the impact of demonetisation,” it added.

According to official figures, India's GDP growth is expected to slow down to 7.1 per cent in the current fiscal mainly due to slump in manufacturing, mining and construction activities in figures which do not take into account the possible impact of demonetisation.

Meanwhile, foreign brokerage HSBC projected sharply lower growth numbers for the year at 6.3 per cent, way lower than the official CSO estimate of 7.1 per cent for 2016-17.

The Central Statistical Organisation (CSO) had over the weekend released GDP estimates wherein it had pegged growth at 7.1 per cent for 2016-17, lower than 7.6 per cent in the previous fiscal year. The CSO said it did not calculate the impact of the note ban on economic growth.

The HSBC report, penned by its chief India economist Pranjul Bhandari noted that the GDP projection “is not of much significance because the CSO has used inputs used for until September/October, which is well before the November 8 demonetisation”.

This is surprising, said the report, as “CSO had access to some post-demonetisation data for banking, it chose to stick to data till October. As such the CSO estimate does not carry the full extent of the drag to activity inflicted by demonetisation”.

As per the report, taking into account cash elasticity of GDP, economy is likely to grow at 6.3 per cent in 2016-17.

“It is not mandatory for the Ministry of Finance to use the CSO advance estimates. We expect it to use a lower real growth estimate that takes into account data released since demonetisation,” Bhandari said.

Further, she noted that the government data on inflation, industrial production, car sales and trade details, etc are expected to be released in the coming days, will give a clearer picture of the unfolding impact of demonetisation.

“We expect lower inflation (primarily led by food prices), weaker industrial growth and a narrower trade deficit,” Bhandari said.

According to her, the CPI inflation is likely to fall further to 3.3 per cent in December from 3.6 per cent in November, as falling food prices may offset increase in oil prices. Besides, WPI inflation may lower to 2.9 per cent in December from 3.2 per cent in the preceding month, in 2016. The brokerage has estimated industrial production to grow at 0.5 per cent in November versus negative 1.9 per cent in October.