Demonetisation to affect Indian economy, growth expected at 6.8%: Ficci Survey

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Indian economy will grow 6.8% this fiscal due to a slow down in the services and infrastructure sectors post demonetization, according to a latest round of Ficci’s Economic Outlook Survey. Significantly, the annual median GDP growth forecast of 6.8% is sharply lower than the 7.3% projected in the previous round of the survey.

The survey was conducted in the months of December 2016/ January 2017 and drew responses from leading economists representing industry, banking and financial services sector. The Central Statistical Organisation had estimated a GDP growth of 7.1% for 2016-17 earlier in January.

According to the Ficci survey, the agriculture sector is expected to witness an uptick in 2016-17 on the back of a good monsoon which is expected to support agricultural production. However, both industry and services sectors are anticipated to moderate. Industry and services sector are expected to grow by 5.7% and 8.5%, respectively in 2016-17.

“The decision of the government to demonetize high value currency notes has had an impact on the cash dependent sectors primarily belonging to the informal economy. This is expected to cause some slowdown in industrial and services sector growth,” the survey observed in its findings.

The economists had a divided view on the timeframe by which the economy would return to normalcy. Although some believed that things will start rolling back to the way they were in the pre-demonetization days by the end of the current quarter (March 2017), others felt that it could take at least two more quarters for things to fully settle (June 2017).

Economists pointed out that India’s economic growth was being propelled by government spending and private consumption and the latter has been hit due to the demonetization move. This will affect recovery in investments and overall growth.

The participating economists opined that demonetization exercise would lead to a healthy correction in many sectors of the economy, especially in the real estate segment. A majority of the respondents expect the RBI to maintain status quo with regard to repo rate on account of domestic and global factors in its bi-monthly monetary policy to be announced in the first week of February 2017. However, they anticipate the accommodative stance to continue with a probable rate cut of 25 bps in first half of the financial year 2017-18.

The economists felt that the forthcoming Union Budget is likely to be expansionary and some fiscal stimulus is on the way from government’s side. The median growth forecast for IIP has been pegged at 1.5% for the year 2016-17, with a minimum and maximum range of (-) 2.1% and 2.9%, respectively. This is marginally lower than the estimate of 1.7% put across in the last survey round.

The median forecast for Wholesale Price Index based inflation rate for 2016-17 has been put at 3.4%, with a minimum and maximum range of 3.1% and 3.5% respectively. WPI inflation is projected at 3.8% for the fourth quarter of 2016-17.

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