The “more disruptive than expected” impact of demonetisation and the Goods and Services Tax is set to slow India’s economic growth down to 6.7% in 2017-’18, India Ratings and Research said on Wednesday. The ratings agency had earlier pegged the growth in Gross Domestic Product at 7.4% in the current financial year.
The agency revised its outlook following continued slowdown in the first two quarters of 2017. The GDP growth had reached a three-year low of 5.7% in the quarter that ended in June. In the first quarter of 2017, growth had slowed to 5.7% from 7.9% in the same period last year.
The negative impact of the new indirect tax system will reverse eventually, but the same cannot be said about the impact of demonetisation, India Ratings said. However, it said that growth will recover in the July-September quarter as the impact of demonetisation is waning and the government is looking into the problems in the implementation of GST. The festival season will also support growth.
The unorganised sector and small and medium enterprises have not yet recovered fully from the government’s exercise to remove high-value currency notes last November, without quickly replacing them. The rollout of the GST was “fairly smooth” but destocking by manufacturers before it and the loss of liquidity for exporters due to delayed tax refund have affected business activity, according to the agency’s report.
Slow growth in industrial output and bank credit make the economic landscape “not very encouraging”, India Ratings said, adding that though the government seems to be planning a stimulus package, the fiscal space it has to do so is “questionable”.
Recently, the United Nations Conference on Trade and Development had also lowered its growth projection for India from 7% in 2016 to 6.7% in 2017.