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LATEST NEWS UPDATES | Slumber fear grips economy

Slumber fear grips economy

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published Published on Nov 18, 2016   modified Modified on Nov 18, 2016
-The Telegraph

The pundits have started to crunch numbers to assess the immediate impact of the Narendra Modi government's demonetisation drive on the economy, businesses and households - and the picture doesn't look too good.

A consensus has started to emerge that the economy will take a hard knock in the short term with GDP growth likely to contract by 0.7 to 1 percentage point over the next year. The maximum impact is likely to be felt in the third and fourth quarters of this financial year.

While the economists quibble over the scale of the macroeconomic impact, there is a growing sense that the cash-dependent sectors of the economy - accounting for around 30 per cent of the GDP - will feel the real heat as money supply contracts sharply.

The big drag on GDP growth is expected to come from the cash crunch in retail trade and related businesses. Consumer durables, real estate, retailing, jewellery, and hotels and restaurants - the wide patch of discretionary spending - will wilt with a potential loss of pricing power.

The informal economy, which some estimate at 45 per cent of the GDP, is expected to stutter over the next few weeks till the government starts to remonetise at least a substantial part of the Rs 14 trillion currency stack that became what Modi called "useless bits of paper" while delivering his shock announcement on the evening of November 8.

"We are staring at a massive downward spiral in the economy," former banker Meera Sanyal said in a televised debate on the virtues of demonetisation. "We have a large and legitimate cash-driven economy that has been massively impacted by the move. And that can only hurt the economy."

"Against the current backdrop, we expect October-December quarter earnings to be impacted the most," brokerage Motilal Oswal said in a report titled Demonetisation: Feedback from the Ground Zero. The brokerage said it was difficult to quantify the earnings impact because of the uncertainty surrounding the duration of liquidity recalibration.
 
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The Telegraph, 17 November, 2016, http://www.telegraphindia.com/1161118/jsp/frontpage/story_119903.jsp#.WC5zSfRnDIV


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