Fitch Ratings has lowered India’s gross domestic product growth forecast to 6.9% from 7.4% for the financial year 2016-2017 amid the cash crunch the country is facing after the Centre’s decision to demonetise Rs 500 and Rs 1,000 currency notes. The rating agency on Tuesday said, “Economic activity will be hit in the fourth quarter of the current financial year by the cash crunch created by withdrawal and replacement of bank notes that account for 86% of the value of currency in circulation.”
However, the agency said that though the medium-term effect of demonetisation on the economy was uncertain, it was unlikely to be large. The agency had earlier said that economic activity would be hit in the October-December quarter because of the cash crunch. “Indian growth has also been revised down to reflect temporary disruptions to activity related to the RBI’s surprise demonetisation of large-denomination bank notes,” Fitch said.
It has also lowered the country’s GDP growth for 2017-2018 to 7.7% from 8%, reported PTI.
The United States-based agency said gradual implementation of the structural reform agenda was expected to contribute to higher growth, “as will higher real disposable income, supported by an almost 24% hike in civil servants’ wages”. However, the agency noted that anticipated recovery in investment was less likely.
“Time spent queuing in banks is also likely to have affected general productivity. The impact on GDP growth will increase the longer the disruption continues,” Fitch said in its Global Economic Outlook - November report. It also stressed on its stand that demonetisation was a one-off event and unlikely to have a major impact on the economy. “People who operate in the informal sector will still be able to use the new high-denomination bills and other options [such as gold] to store their wealth,” the agency said.
Earlier in a report, Fitch Ratings had observed that demonetisation was likely to affect economic sectors relying on cash transactions, and that it would have a negative impact on bank asset quality. “People that operate in the informal sector will still be able to use the new high-denomination bills and other options [like gold] to store their wealth,” said the report.