Demonetisation: India to see lower growth for 2 quarters on cash crunch, says HSBC

New Delhi: India's GDP growth numbers are expected to see a decline of 2 percent in the third and fourth quarters of the current fiscal, as effective currency in circulation has contracted significantly, says an HSBC report.

However, it said, as enough notes are printed, growth is likely to return to the "7 percent ballpark".

Representational image. PTI

Representational image. PTI

According to the global financial services major, the government's decision to abolish old stock of high denomination currency (demonetisation) and issue new notes
(remonetisation) could have a mixed impact on the macro economy over a year.

"Using the cash elasticity of GDP, we estimate that growth could be about 2 percent lower in third quarter and fourth quarter of 2016-17 (ending March), given that effective currency in circulation has contracted by 60 per cent (as of early-December)," HSBC said in a research note.

Lower growth for at least two quarters means that the output gap will take longer to close and the revival of the investment cycle, which is already very weak, could be pushed out even further, it added.

Longer-term gains would depend on follow-up reforms. In order to lower the stock of black money substantially, the government would have to attack other shelters of black money (real estate, gold, foreign currencies).

With regard to digital payments, the government should address bottlenecks especially in rural India, it said.

"If the government follows up with a spate of reforms, gains could be immense, as the official economy absorbs the parallel economy," HSBC said.

Regarding the Goods and Services Tax (GST), the report said that the April deadline will be missed and implementation will happen later in the year.

HSBC expects the medium-term addition to GDP growth from this reform to be about 40 bps.

"Both reforms have Indian-style characteristics; an imperfect version is initially implemented and is likely to be disruptive," HSBC said, adding that the quantum of long-term gains will depend on follow-up action.

Updated Date: Jan 12, 2017 13:41 PM

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