The shortage of cash due to demonetisation could result in a drastic slowdown in GDP growth for 2016-17 to 3.5 per cent from an earlier projection of 6.8 per cent, according to an Ambit Capital report.
The report predicted that the second half of this financial year will see a GDP growth of only 0.5 per cent, down from the 6.4 per cent forecast by Ambit in the first half of the year. Official estimates for the first quarter of the year pegged the GDP growth at 7.1 per cent, the slowest in six quarters.
However, the government has been optimistic of clocking higher growth in 2016-17 than the 7.6 per cent recorded in 2015-16. “(One effect of demonetisation) will be the transactional hit created by a hard cash deficit as banks are unable to replace the demonetised cash expeditiously,” the report’s authors wrote, noting that this is bound to have a paralysing effect on economic activity in the short run.
The report predicts that GDP growth in 2017-18 will also be affected by demonetisation, slowing to 5.8 per cent from an earlier estimate of 7.3 per cent.
Ambit also said that demonetisation could result in small businesses in the informal sector becoming unviable. It added that the effect on the real estate sector could also be severe based on its estimate that 30-40 per cent of the value of purchases take place using black money.
“(The third effect) is likely to be a structural boost to tax-paying businesses in the formal sector which are able to capture the market share vacated by the informal sector,” according to the report.
There could also be a detrimental effect on the Sensex, Ambit said, adding that it had scrapped its March 2017 Sensex target of 29,500 and was instead predicting a target of 29,000 for March 2018. One positive effect of demonetisation could be on interest rates. Ambit predicts the RBI will cut interest rates by 25-50 basis points in the second half of this year.