A dampening of economic activity? (thehindu)

Prime Minister Narendra Modi’s decision to abruptly withdraw legal tender status for Rs.1,000 and Rs.500 notes to save the country from “the grip of corruption and black money” has had one predictable side effect: a dampening of economic activity. With cash availability significantly impaired as a result of the sudden withdrawal of the high-value banknotes that constituted more than 86 per cent of the currency in circulation as of March 31, a palpable impact has been felt across the entire economy. A snapshot of manufacturing from the Nikkei India Manufacturing Purchasing Managers’ Index released on December 1 revealed that demonetisation had slowed buying activity and production across the board, and led to the weakest expansion in orders in four months. The survey indicated that producers of consumer goods are among the worst hit, a signal that a key engine of India’s world-leading pace of economic growth — private consumption demand — appears to be sputtering on account of the cash shortage. That the impact is likely to extend beyond the current quarter appears certain, according to the downward revisions of growth projections announced by brokerages and credit rating agencies. The median reduction in GDP growth estimate for the year by the 13 forecasters indicates that the pace of growth will be slower by at least 50 basis points, with two of them dialling back the number by one percentage point or more.

Data released by the government on November 30 put GDP growth in the July-September period at 7.3 per cent, as the agriculture sector’s performance was buoyed by an almost normal south-west monsoon. That this came after two successive years of drought helped boost the area sown. Still, a moot question relates to gauging the impact the cash shortage is likely to have had in rural areas both from a consumption perspective and in terms of the potential disruption caused to farming operations. Given the less-than-adequate penetration of formal banking channels, economic activity in small towns and villages is largely cash-based, and it remains to be seen how the agrarian economy will recover in the short to medium term from this disruption. While the biggest contributor to gross value added, the services sector, is expected to sustain a hit, small and micro enterprises that conduct a sizeable part of their business through cash transactions are also bound to be impacted. And with the external environment yet to revive, the RBI and the government have their task cut out to ensure that the economy doesn’t slide into a protracted slowdown.