Life after demonetisation: GDP forecasts

India could hang on to the tag of world's fastest-growing economy going by forecasts based on the strength of first-half expectations despite shocks emanating from the cancellation of high-value notes. GDP could still expand faster than the 6.6% at which China is expected to grow by the IMF.
Forecasters across the board have reduced their FY17 growth estimates on account of demonetisation. Crisil, the country's biggest rating agency, sees growth in the year to March next year at 6.9%. Citi sees it at 7.2% with a downside risk while IDFC Bank puts it at 6.9%.
To be sure, there's little data related to the impact of the November 8 demonetisation to back up the estimates.
Among the numbers available is the Purchasing Managers' Index for November, which fell to 52.3 from a 22-month high of 54.4 in October. The RBI's commentary along with its monetary policy statement on December 7 should provide more clarity . The central bank had previously estimated growth at 7.6%. Indian economy expanded 7.2% in the first half and 7.3% in the September quarter.

The decline in growth estimates from near 8% for FY17 to below 7% in most cases stems from the shock to consumption from the note withdrawal and its spillover effect on investment, which fell 5.6% in the July-September period from a year ago, the third successive quarter of contraction. Private consumption rose 7.6% in the September quarter and was seen driving the economy higher with rural demand driven by a good monsoon topping up the lift in urban consumption from the seventh pay commission income bump.
The lack of cash may hit genuine demand while the move against black money could slash demand for mobiles, luxuries, dining, travel, tourism and real estate.Cash accounted for 86% of consumer payments in 2013, said ICRA.
India Ratings made the same point pegging FY17 growth at 6.8%.
HSBC expects 5% growth in the December quarter and 6% in the January-March period, two percentage points lower than estimated earlier. It's one of the few forecasts that expects India to slip below China, putting FY17 growth at 6.3%.

The impact on the economy and its duration will depend on how quickly remonetisation occurs, the government takes policy action to deal with the cancelled currency and budget initiatives. IDFC Bank expects the economy to normalise from the first quarter of FY18, suggesting a two-quarter disruption in activity. The demonetisation is expected to further dent inflation, building the case for a rate cut in the December 7 monetary policy. The expectation is that RBI will cut interest rates by up to 50 basis points on December 7.
Crisil expects consumer inflation at 4.7% in FY17 against its earlier estimate of 5%. A reduction in interest rates is expected to spur demand for housing when married with the expected correction of up to 30% in prices due to the cancellation of high-value notes.
HSBC said recovery could be faster depending on the speed at which demonetised money returns.

Over the longer term, demonetisation is expected to yield significant gains for the economy, providing a shock that could alter consumer behaviour for good.