Tuesday, January 17, 2017

India's GDP to grow only by 6% till 2021-22, as demonetisation impacts consumption, delays investment: CMIE

By Our Representative
In a prediction which has stunned India's top policy makers, the powerful consulting firm, Centre for Monitoring Indian Economy (CMIE), has said that India’s real gross domestic product (GDP) growth would slip to 6% in 2016-17, and would remain “about 6% per annum for the next five years.”
Insisting that “demonetisation shock” has caused “sustained downturn” of the Indian economy, which was “expected to gradually accelerate its real GDP growth rate from 7.5% to over 8% per annum”, CMIE, which is a premier data dissemination and analysis institute of the country, says that “the immediate impact of demonetisation was a sharp reduction in private final consumption expenditure.”
This, it says, has accompanied with “a corresponding fall in retail prices of perishable commodities, a substantive dislocation of labour and corresponding losses in wages and a break-down of supply chains in many parts”, adding, this happened because of declined availability of "cash on hand to transact retail purchases" following the removal of 86% of the currency in circulation.”
“The cash to GDP ratio is high at 12% and reportedly over 90% of the transactions in India are cash based. As a result, the sudden and sharp reduction in currency had an immediate and significant impact on consumption expenditure”, says Mahesh Vyas, Managing Director, CMIE.
“Labour has been dislocated from productive work as they were forced to line up in front of banks to convert their old currency notes into new ones”, CMIE says, adding, “Given that banks did not have sufficient new currency notes, this led to substantial dislocation of labour and a corresponding loss of wages.”
“The fall in consumer demand combined with fall in availability of cash also led to a fall in the demand for labour. This sets in a vicious cycle of low demand for labour and low consumption expenditure”, CMIE says, adding, the low demand will “persist” till “liquidity is fully restored, confidence in liquidity is fully restored, and “consumers are yanked out of their equilibrium at lower levels of consumption of non-essential commodities. ”
Predicting that “none of these conditions are expected to be fulfilled in a hurry”, CMIE believes, things are unlikely to improve also because the Rs 2000 note is unlikely to restore confidence among consumers for quite some time because the government or Reserve Bank of India (RBI) “have not taken steps to scotch rumours of demonetisation of the note.”
“As a result, the effective liquidity in the markets is much lower than is measured by the issuance of new currency notes. The Rs 2000 note is less liquid than it would be without the rumours regarding its lifespan”, it adds.
“Further”, says CMIE, “A flight from currency in hand to other asset forms because of a fear of potential loss of liquidity through further demonetisation and a fear of raids or enquiries, could structurally reduce the propensity to spend on consumption goods.”
“As a result”, notes the top firm, “We expect the hit on consumer spending to last much longer than just a few quarters. Private final consumption expenditure (PFCE) grew 7.5% in 2015-16. We had PFCE expected growth to accelerate to 7.8% in 2016-17 and then to over 8% going forward. Now, we have scaled back the PFCE growth estimate to 5.5% for 2016-17 and to 6.8% per annum going forward.”
While, CMIE says, it does expect government spending to “offset part of the impact of demonetisation through increased spending”, it insists, “But, government has a smaller role and can contain the damage only partially.”
“This trend shift in consumption expenditure will delay a revival in investments”, says CMIE, adding, “We expect capital formation to shrink by nearly 2% in 2016-17 as against an earlier expectation of a 2.3% increase in the same.”

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