Nov 10, 2016 10:02 AM IST IST | Source: Moneycontrol.com

A temporary blip likely in broader economy on note ban

India‘s economy grew 7.1 percent during April to June, the slowest in 15 months, but the government and experts have been pointing out that a pick-up was likely in the next few months riding on good rains, a pay bonanza for government employees and festive-season buying.

Gaurav Choudhury
Moneycontrol

 
The government’s decision to ban Rs 500 and Rs 1000 notes may temporarily slow down the broader economy’s growth as consumer spending will likely fall in the immediate weeks as households adjust to the new system.

India’s economy grew 7.1 percent during April to June, the slowest in 15 months, but the government and experts have been pointing out that a pick-up was likely in the next few months riding on good rains, a pay bonanza for government employees and festive-season buying.

According to the national income data for the first quarter (April-June) of 2016-17, private final consumption expenditure (PFCE)—a gauge to measure household spending— Private Final Consumption Expenditure (PFCE) at current prices is estimated at Rs 21.19 lakh crore, or about 55 percent of the gross domestic product (GDP).

Household spending on aspirational and essential products have been the edifice of the India growth story enabling it to cement its place as the world’s fastest growing major economy outpacing China.

Hopes of an economy-wide revival had also sprung anew on good summer rains this year will likely raise farm income, which was expected to push up sales for such as televisions and cars.

Analysts also expect hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners to  boost spending on cars and houses.

The unexpected ban on high denomination currency notes, however, could curtail consumer spending, particularly in rural areas where most transactions take place in cash.

This delay in household spending could further push back investment growth with firms already sitting on vast unused capacities in consumption-linked sectors.
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