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HomeWorldIndia’s Forecast for Economic Growth Set to Show Impact of Cash Crunch

India’s Forecast for Economic Growth Set to Show Impact of Cash Crunch

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India will on Friday get its first official indication of the impact of Prime Minister Narendra Modi’s war on cash on the larger economy.

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The country’s statistics ministry will release its estimate of growth in gross domestic product for the current fiscal year and analysts will be watching to see if it can maintain its 7.6% rate despite the severe cash shortage sparked by the Nov. 8 move to cancel about 86% of the country’s bank notes.

Critics of the decision say it has caused hardship, particularly in villages and small towns where the new notes haven’t been so readily available and facilities for digital transactions are few.

The forecast will show whether India can keep its coveted position as the world’s fastest-growing major economy, a status that some economists say India could lose to its neighbor China, which is projected to grow between 6.5% and 7% in 2016.

Siddhartha Sanyal, chief India economist at Barclays, said that the move could result in a reduction in the growth rate of of between 0.5 and one percentage point for this fiscal year. Before the cash crunch, the bank predicted that India’s economy would grow 7.5% in the same period.

The real-estate sector is expected to be among the worst hit, as a large portion of such transactions for property take place in cash. Related sectors such as construction and steel as well as cement, are also expected to be hurt.

Other recent data have already hinted at a slowdown.

India’s infrastructure output data earlier this week showed a significant weakening in cement and steel production growth. Activity at manufacturing and services companies also contracted in December, according to private surveys released this week.

Still, it is uncertain how deep the slowdown will turn out to have been.

“While there are downside risks to a lot of numbers like construction and manufacturing, some other numbers like banking and financial services might spring an upside surprise,” Mr. Sanyal of Barclays said.

Deposits have shot up as Indians have rushed to put old currency in accounts, providing banks with more money to lend.

Meanwhile, Finance Minister Arun Jaitley said last week that sowing of winter crops–which takes place between October and January–rose 6.3% from a year earlier, indicating that concerns about farmers being hurt by the cash crunch are exaggerated.

Some economists caution the forecast is unlikely to be accurate as a significant part of the economy is unorganized, making it difficult to assess how badly small businesses have been affected.

Further, any benefits of increased tax revenue as a result of the crackdown on tax evaders will take time to show, said Sujan Hajra, chief economist at Anand Rathi Securities.

“This data, as of now, will be of impressionistic value and I would be surprised if the government officially reduces the growth in any significant way.”

For breaking news, features and analysis from India, follow WSJ India on Facebook.

(via WSJ)

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