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Economy

Modi's 'demonetization' seen curbing Indian growth in 2016

Analysts cut full-year estimates as liquidity crunch hurts businesses

NEW DELHI -- India's economy grew 7.3% in the July-September quarter but full-year growth is expected to slow significantly due to the shock caused by last month's scrapping of high-value bank notes that sucked out 86% of all currency in circulation in value terms.

The rise in gross domestic product in the second quarter of the fiscal year was slightly higher than April-June's 7.1%, official data showed Wednesday. However, it was marginally lower than analysts' estimate of roughly 7.5%.

The GDP data does not reflect the impact of the government's surprise demonetization move announced on Nov. 8 by Prime Minister Narendra Modi to ban and withdraw 500- and 1,000-rupee notes from circulation in a clampdown on so-called "black money" -- hidden wealth, corruption and counterfeit currency.

While India remains the fastest-growing major economy in the world, outpacing China which grew 6.7% in the same quarter, the outlook for its full year is clouded by the demonetization that led to a severe liquidity crunch in an economy that mainly runs on cash.

The government has introduced replacement 500- and 2,000-rupee notes, worth about $7.30 and $29.20, respectively, but the new currency is not in full circulation yet. The banned notes can be deposited in banks until Dec. 30, but cash withdrawals from accounts have been restricted to 24,000 rupees a week per person and not more than 2,500 rupees per day at automated teller machines.

The drastic measure has been particularly painful because an estimated two-thirds of India's GDP -- about 90 trillion rupees -- is conducted in cash.

Outlook dented

Fitch Ratings lowered India's GDP growth forecast for the fiscal year ending in March 2017 to 6.9% from 7.4% to reflect "temporary disruptions" to economic activity after demonetization.

In its November Global Economic Outlook, Fitch said economic activity will be hit in the October-December quarter because of the cash crunch caused by the currency ban.

Indian consumers have not had the cash needed to complete purchases, Fitch said, referring to reports of supply chains being disrupted and farmers unable to buy seeds and fertilizers for the sowing season. "Time spent queuing in banks is also likely to have affected general productivity," the ratings agency said.

Fitch added that the medium-term impact of the currency withdrawal on GDP growth is uncertain, but is unlikely to be large. "Most importantly, demonetization is a one-off event," it pointed out.

Fitch also revised down GDP growth forecasts for the next two years to 7.7% from 8%.

Separately, Morgan Stanley cut India's GDP growth forecast for the current financial year to 7.3% from 7.7%, citing the same reasons as Fitch. For the 2018 fiscal year, it revised the growth forecast slightly to 7.7% from 7.8%, and projected an expansion of 7.9% for the year ending March 2019.

Sunil Kumar Sinha, principal economist at India Ratings & Research, said all broad sectors of the economy -- industry, agriculture and services -- will be affected in the wake of the currency ban.

"But there are some positive [aspects] as banking and finance are expected to get some boost," he told the Nikkei Asian Review. Digital companies such as those in e-commerce and e-payments will certainly benefit, he added.

Sinha said his company was still working on GDP growth estimates but would be revising down its previous projection of 7.8% for the full year.

On Nov. 24, former Prime Minister Manmohan Singh, who is also an economist, said in parliament that demonetization will hurt growth in sectors such as agriculture and small industries.

"My own feeling is that the national income, that is the GDP, can decline by about 2% as a result of what has been done," Singh said. "This is an underestimate, not an overestimate."

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