New Delhi: Rating agency Fitch on Tuesday revised downwards its GDP growth forecast for India to 6.9 per cent current financial year from 7.4 per cent as demonetisation will impact consumption.
It said that impact of demonetisation on GDP growth will increase the longer the disruption continues. “Economic activity will be hit in fourth quarter 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,” said Fitch.
It said that due to the demonetisation, Indian consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season.
Fitch said that time spent queueing in banks is also likely to have affected general productivity. However, it said that medium-term effect of the currency withdrawal on GDP growth is uncertain, but is unlikely to be large.
“Most importantly, demonetisation is a one-off event. People who operate in the informal sector will still be able to use the new high-denomination bills and other options (such as gold) to store their wealth. There are no new incentives for people to avoid cash transactions. The informal sector could soon go back to business as usual,” said Fitch.
It said that anticipated recovery in investment looks a bit less certain in light of ongoing weakness in the data.
“The RBI’s policy rate cuts by a total 150 basis points since the beginning of 2015 are likely to feed through to higher GDP growth, even though monetary transmission has been impaired by relatively weak banking sector health A surge in low-cost funding due to the demonetisation may remove a constraint on banks that prevented lending rates from keeping pace with the RBI’s policy rate cuts in recent years,” said Fitch.
