Demonetisation will result in some uncertainty in third quarter of fiscal 2016-17, says Centre

New Delhi [India], Dec.1 : India on Wednesday posted the world's fastest growth rate for a large economy in the September quarter, yet said that the nation could experience some amount of uncertainty in the third quarter of fiscal 2016-17 due to the government's decision to demonetise Rs.500 and Rs.1000 currency notes.

Gross domestic product (GDP) clocked an annual 7.3 percent growth between July and September, faster than 7.1 percent in the previous quarter and higher than China's 6.7 percent.

"Normal GDP growth has picked up a fair amount, accelerated from about 10.4 to 12.1. And I think, this is kind of especially good news for private sector. Their balance sheets will be somewhat helped by the fact that normal GDP growth has picked up. I think exports have also at least reversed the decline. There's small increase in exports, so that is also good news," said Chief Economic Adviser Arvind Subramanian.

That impressive headline figure, however, failed to mask the underlying weakness in Asia's third-largest economy.

Not only was the overall growth lower than expected, it was primarily driven by consumer and government spending.

Contraction in capital investment deepened. "Investment is down substantially that is something which needs to be watched and also some of the increase in GDP is on the strength of government consumption expenditure," Subramanian said.

Subramanian added that the impact of demonetisation in the third quarter, however, will be subject to a considerable amount of uncertainty.

With Prime Minister Narendra Modi's decision this month to scrap 500 rupee and 1,000 rupee banknotes as part of a crackdown on tax dodgers and counterfeiters denting consumer spending, which makes up 55 percent of India's economy, the outlook for upcoming quarters is not encouraging.

In a country where most people are paid in cash, and buy what they need with cash, Modi's decision has removed 86 percent of the currency in circulation virtually overnight.

His shock therapy has left companies, farmers and households suffering. Economists agree the economy will take a hit this quarter and for several quarters to follow. But opinions on the scale of damage vary widely. Finance Minister Arun Jaitley expects a minor impact lasting for a quarter or two. Private economists, however, reckon the impact would be felt through 2018. The most optimistic forecasts suggest that India will finish this fiscal year in March with a respectable, but slightly lower, growth rate of 7.3 percent.

But the most pessimistic forecast, from Mumbai-based brokerage Ambit Capital, is for a precipitous drop to 3.5 percent growth.

Modi has sold the move as an attack on the illicit "black economy", it is also aimed at shrinking the cash economy which has lasted so long because few Indians have bank cards and infrastructure for online transactions is poor.

According to Credit Suisse, more than 90 percent of consumer purchases are made in cash, while another study shows 85 percent of workers are paid in cash.

The crackdown will also have a spillover effect for India's formal economy. Supply chains at small, medium and even larger companies are already crumbling. Trucks are stranded with no money for fuel, workers won't load goods for free, and distributors can't pay up.

Wholesale markets in many cities are shut. In the wheat-growing states, farmers said they have run out of cash, and as a consequence sales of seeds and fertilizer have plunged halfway through the sowing season.

At least the potential for lower inflation holds out some hope that the Reserve Bank of India will extend its easing cycle with a quick interest rate cut - possibly as early as next month.

Source: ANI