Lower production hits economy

Economists with the government may disagree, but the country’s GDP growth in 2016-17 may show a significant drop by nearly one per cent, mainly due to the current cash shortage that has severely hit the small and medium scale industry. The year-end measures announced by the Prime Minister, including 3 to 4 per cent interest relief for low cost housing, full interest relief for loans for Rabi crop for 60 days and credit guarantee for small traders, followed by big lending rate cuts made by the State Bank of India and a few other nationalised banks may help improve the performance in housing sector, the farm sector and small industry to an extent. They are, however, unlikely to bring much relief to the economy as a whole for the current year and the next financial year. 

Cash shortage will continue to hit the agriculture, organised sector of industry, MSMEs and even the middle range housing sector. Real estate prices have already crashed. The impact of the cash shortage on the economy is expected to last longer while lower lending rates will invariably bring down deposit rates, which are now ruling at levels seen almost 10-year ago. The banking operation will come under heavy stress due to the lower margin between the deposit and lending rates. Especially, those banks, sitting on large fixed deposits at interest rates between 8.25 per cent and 9.25 per cent, have reason to worry.

Although the proposed GST introduction may bring some positive impact on the GDP calculation, no one is sure what it will mean to the cash-starved economy in the near term. Also, the final compromise between the Centre and the states on GST is unlikely to meet the original expectation of the Union government of the new tax regime’s contribution to the economic growth. Higher domestic tax collection – direct and indirect minus import levies – need not necessarily indicate higher GDP growth. It may merely mean better tax compliance. Tax sops in the 2017-18 budget and a much greater response to the government’s ‘Make-in-India’ programme may certainly have a positive impact on the GDP growth, but the concern for cash shortage will continue. Even if the digital transaction improves by 10 to 15 per cent during this year, nearly 80 per cent of domestic financial transactions will remain cash dependant. That is a big cause of worry for all. As in developed economies all over the world, the process of adopting digital transaction has to evolve and should not be thrust on the people by a government. The level of education, state of markets and economy, the efficiency standards of the encryption system and, above all, the faith in the digital system are essential to the success of digital transactions. It may take years for India to reach a level where the public, instead of the government, pushes for an active digital transaction system.

The first 50 days of demonetisation seem to have impacted the poor, the daily wage earners and the common man more than the rich and big time black money hoarders. The massive gold import in November and its quick consumption in centres such as Delhi, Ahmedabad, Hyderabad, Chennai and Bangalore – known as large dens of black money hoarders – clearly suggest the innovative route taken by the rich to substantially convert their unaccounted cash into gold rather in questionable bank deposits. The Enforcement Directorate under the Finance Ministry itself revealed that 60,000 kg of gold was imported in November and ED sleuths suspected that a lot of black money might have been illegally converted into gold through bullion traders. While the bullion trade boomed in November and December, other domestic businesses and exports contracted after demonetisation. The latest Nikkei India Purchasing Managers’ Index (PMI) recorded below the crucial 50 point threshold level to 49.6 in December – for the first time in 2016. In November, it was 52.3. The official commerce and industry ministry data showed the core sector production growth rate slipping to 4.9 per cent in November compared to October’s growth rate of 6.6 per cent.

Although some of the global rating agencies are still hopeful that India’s economy may be less hurt by cash shortage and the government’s declared aim of launching a crusade against black money, hard-nosed international agencies disagree. As against the year-end report on economic and social survey for Asia the Pacific 2016 by the UN Economic and Social Commission (ESCAP), projecting India’s economic growth at 7.6 per cent in 2016-17 and 2017-18, Fitch became the first global rating agency to lower its growth forecasts for India, citing the impact of demonetisation of high-value banknotes on Asia’s third largest economy. Fitch had cut India’s growth forecast for the current fiscal to 6.9 per cent. Before the November 8-9 demonetisation, Fitch had predicted an 8 per cent GDP growth for India in 2016-17. “Due to the demonetisation, Indian consumers have not had the cash needed to complete purchases, and there have been reports of supply chains being disrupted and farmers unable to buy seeds and fertiliser for the sowing season. Time spent queueing in banks is also likely to have affected general productivity. The impact on gross domestic product growth will increase the longer the disruption continues,” it said. There is no doubt that the government, the Reserve Bank of India, and the local banking system have been seriously trying to ease the cash situation, especially in rural areas and smaller towns, despite their constant struggle to push digital commerce, but the economy is unlikely to recover from the currency crunch shock too soon.