New Delhi: Macroeconomic effects of the present cash crunch in India include a temporary delay of consumption and investment, disrupted chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues.
There, according toThomas Rookmaaker, Director in Fitch’s Asia-Pacific Sovereigns Group , are many elements to the demonetisation, which makes it difficult to quantify the impact on real GDP growth and explains the wide range of forecasts by different analysts.
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, points out Rookmaaker. A significant decline in the growth number for this quarter is highly likely, but for the fiscal year as a whole the decline may still be relatively moderate, he goes on to underscore adding “People find inventive ways around the cash crunch as well – there is always the art of jugaad. At the same time, this seems to suggest that demonetisation is a one-off event and is not likely to generate a significant structural shift of activity from the informal to the formal sector.”
Rookmaaker further states: “We still expect India’s GDP growth to trend higher than China’s in the medium term. In India we expect GDP growth to accelerate in FY2018 on the back of reform implementation, monetary easing of the past year and infrastructure spending, while in China a continued increase in leverage in the broader economy is more and more becoming a burden for growth. In China we forecasts real GDP growth of 6.4% in 2017, down from a projected 6.7% in 2016, due to the impact of recent macro-prudential tightening measures targeting the housing market.”
On the positive side, according to the Fitch Director, the demonetisation may improve the fiscal position to the extent more earnings will be declared and a transfer is possible from the RBI to the government of the seigniorage earned from unchanged notes. A stronger revenue intake would be positive from a rating perspective, as the fiscal position forms the Achilles’ Heel in India’s sovereign credit profile, given the high general government debt burden and fiscal deficit compared with peers. Beyond the immediate policy issues of managing the cash crunch as best as possible and trying to mitigate the worst side-effects, it would be interesting to see what further steps the government will take to formalise the economy and structurally generate higher government revenues. “