Modi Cash Shock Seen Tripping Up Accelerating India Economy

  • GDP grew 7.5% in July-September, Bloomberg survey shows
  • Analysts cutting FY17 forecasts after Modi’s Nov. 8 cash move

Narendra Modi

Photographer: Nicky Loh/Bloomberg

Rather than highlighting how far India’s economy has come under Prime Minister Narendra Modi’s pro-growth administration, Wednesday’s gross domestic product report will underscore just how much there is to lose from his shock clampdown on cash.

Expansion probably accelerated to 7.5 percent in July-September, according to the median of 25 estimates in a Bloomberg survey of economists. However, analysts are cutting forecasts for growth to 7.4 percent from 7.7 percent for the year through March as Modi’s Nov. 8 move to invalidate 86 percent of currency in circulation dents demand in an economy where 98 percent of consumer payments are in cash.

"Attention has shifted to the impact of the demonetization initiative on the real economy," Radhika Rao, an economist at DBS Bank Ltd. in Singapore, wrote in a report on Monday. Growth in October-December could dip below 6 percent, she said.

Such a slowdown would imperil India’s position as the world’s fastest-growing major economy. A bigger concern, though, is how soon the $2 trillion market can fully rebound from the effects of Modi’s measure.

"Macroeconomic effects of the cash crunch include a temporary delay of consumption and investment, disrupted supply chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues," said Thomas Rookmaaker, director in Fitch Ratings’s Asia-Pacific Sovereigns Group. "The impact on GDP growth is clearly going to be negative in the short run and depends to a large extent on how long the cash crunch is going to take."

Read more: India’s cash chaos by the numbers

By some estimates, Modi may need until May to replace the 23 billion bank notes he’s sucked out. Others, such as Morgan Stanley’s Chetan Ahya, estimate that about 98 percent of cash required for transactions will be in the system by mid-December. That means consumption -- which accounts for 60 percent of GDP -- will recover from the April-June quarter though private investment will take time to improve, he said.

India’s GDP will grow 7.4 percent in the current fiscal year through March, according to the median of 15 estimates in a Bloomberg survey conducted after Modi announced the cash clampdown. A separate survey comprising five economists predicts October-December expansion at 6.6 percent and January-March at 7.6 percent.

Central Bank Review

Following Wednesday’s GDP data, which is due at 5:30 p.m. in New Delhi, attention will shift to a purchasing managers’ index due Thursday that will offer a first assessment of the impact on manufacturing. Services PMI is due Dec. 5 and the central bank will review interest rates Dec. 7.

Governor Urjit Patel will probably reduce the benchmark repurchase rate to 6 percent from 6.25 percent to arrest negative spillovers from the shock, according to Citigroup Inc. A private index compiled by BSE Ltd. and the Centre for Monitoring Indian Economy signaled a sharp surge in urban unemployment this month, as reports poured in of construction supervisors unable to pay their daily-wage laborers.

The Reserve Bank of India’s decision will be a "close call," Citigroup economists Samiran Chakraborty and Anurag Jha wrote in a report on Sunday. "In an uncertain economic environment since the demonetization exercise, the December monetary policy has to focus on a prudent risk management approach rather than a simple growth-inflation trade-off."

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