Ex-PM Manmohan Singh sees 2% fall in GDP due to demonetization

Moneycontrol BureauFormer Prime Minister Manmohan Singh said today in Rajya Sabha that GDP growth could decline by 2 percentage points as a result of the demonetisation move by the government. He said agriculture and small scale industries would be badly hit as a result of the move, adding that 90 percent of India's workforce was in the unorganised sector. The Central Statistics Office and the RBI have both projected a GDP growth of 7.6 percent for this fiscal. The CSO will release the first advance GDP estimates for FY17 on 7 January 2017.Auto, cement sales for November and December (released on the first of the following month) and industrial output for November (to be released sometime in January) could give the first indications of how severe the impact has been.While most economists and financial market experts have hailed the move as a long-term positive for the economy, they see it hurting growth in the short-term.Many broking firms have lowered their GDP estimates for FY17, and some economists feel the slowdown could prolong into FY18 as well.A quick look at what some of the broking firms are saying:“In the near term, discretionary spending and sectors reliant on the cash economy will see a sharply negative impact. We may even see the autumn harvest and the winter crop sowing to be impacted, which may lead to a slower-than anticipated growth in agricultural production which could impact the macro economy over the next two quarters, before recovering in 1QFY18.” –Deutsche Securities“Initial feedback indicates a significant double digit impact over the next couple of months for auto demand. Other consumer companies and financials warned of a near-term impact although most expect demand should start normalising over the next one to two quarters.”—CLSA“We have lowered our growth forecasts for FY16-17 and FY17-18 to 6.9 percent and 7.4 percent, respectively. In theory, the disruptions from currency demonetisation should be temporary, but we expect the impact on growth to last beyond six months. Wealth destruction, especially in the real estate sector, will likely have a high multiplier effect on the rest of the economy.”—Credit Suisse“Expect GDP growth to decelerate from 6.4 percent in 1HFY17 (estimated) to 0.5 percent in 2HFY17 with a distinct possibility of GDP growth contracting in 3QFY17.However, from 3QFY17 until 4QFY19, we expect a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying biz in the informal sector become unviable.”—Ambit Capital