Domonetisation Impact: Experts warn GDP growth may tumble down

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Delhi, 23 Nov: The government’s decision to withdraw high-value currency notes may turn critical for the economy of the country, as consensus says the GDP growth could slow by a whole percentage point in the next 12 months.

Every sector is witnessing a steep decline in sales. Pawan Kant Munjal who runs Hero MotoCorp, the world’s largest motorcycle maker said that “The footfall at our dealerships is half of what it was in October.

Varun Berry, managing director of Britannia, the country’s largest biscuit maker also expressed a 30% to 70% drop in sales of FMCG, which includes everyday items such as soap, detergent and toothpaste, in addition to packaged foods.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector.

Noticing, half of the population still does not have a bank account. Less than 300 million access internet, and hence the overwhelming majority is unable to make electronic payments.

The demonetisation, arguably the biggest currency culling the world has seen, pulverised 86% of the value of notes in circulation.

Ratings agency Fitch stated on Tuesday that it would revise down its India growth forecasts for the fourth quarter.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted…The time spent queuing in banks is also likely to have affected general productivity… ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor.

According to HSBC report, India’s GDP growth, which clocked 7.1% in the first quarter, could down by up to a percentage point in the next 12 months.

The National Institute of Public Finance and Policy (NIPFP) warns of a contraction and social unrest. “In the short term, prices of essential commodities, including food items, will only go up because trucks are stranded,” says NIPFP’s R Kavita Rao.

The automobile industry, which accounts for 7.1% of the GDP, is also facing a fall in stock prices of up to 12% after the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%.

Real estate, known to be fuelled by cash, has witnessed a 20% fall in sales since November 8.

Electronic commerce, where the very Indian innovation of cash-on-delivery accounted for nearly 70% of transactions, is feeling crippled. “There is some disruption, and it’s not certain if this is a two-month or six-month event,” said Ashish Gupta, MD, Credit Suisse India.

Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%. Even though chemists are allowed to take old currency notes, distributors are not.

In gems and jewellery, 80% of the purchases are in cash. “It may weaken the credit profile of industry players due to the high working capital cycles,” stated Sunil Kumar Sinha, principal economist at India Ratings and Research.

 Wefornews Bureau

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