India Ratings cuts GDP estimate citing demonetisation, GST

India Ratings and Research (Ind-Ra) an arm of global rating agency Fitch has cut India’s gross domestic product (GDP) growth forecast to 6.7% from earlier expected 7.4% in the current fiscal citing the disruptive impact of demonetisation and the new goods and services tax (GST) which will be slower than the 7.1% growth reported in fiscal 2017.
“Sucking out the high denomination currency while failing to remonetise the economy quickly has in many cases proved fatal for the unorganised sector/small and medium enterprise where business transactions are heavily cash dependent. As these enterprises have still not been able to recover fully, their pain is finding a reflection in overall economic growth,” Ind-Ra said in the note.
India’s GDP growth has been in a free fall since the first quarter of the last fiscal year. Government statistics show that growth has slumped from 7.9% in the first quarter last year to 7.5% in the second quarter to 7% in the third quarter and further to 6.1% in the fourth quarter before falling to 5.7% in the first quarter of the current fiscal year a three year low.
Ind-Ra said that the poor GDP growth in successive quarters has changed the growth prospects for fiscal 2018. “The combined effect of demonetisation and introduction of goods and services tax (GST) is proving to be more disruptive for the economy than was expected earlier. While the introduction of GST cannot be faulted on account of its eventual benefit to the economy, the same cannot be said about the impact of demonetisation.”
On November 8 last year Prime Minister Narendra Modi announced the withdrawal of high denomination Rs 500 and Rs 1000 currency notes with an aim to curb black money, promote digital payments and curb funding to terrorists.

These notes made up 86% of the currency in circulation and their overnight demonetisation created chaos across the country especially because supply of new notes took time.
The government also did not gain much from extinguished liabilities of these currencies as 99% of the demonetised notes were exchanged through banking channels.

Ind-Ra said that though the government has initiated crucial reforms like the insolvency and bankruptcy code, corporate debt restructuring, re-capitalisation of banks, GST, but their impact will be visible only in the medium to long term.
“Overall, the current economic landscape is not very encouraging – i) index of industrial production grew at a dismal 1.2% in July 2017, ii) bank credit is showing no signs of a pick-up, iii) consumer price index based inflation at 3.6% in August 2017 is a five-month high, iv) current account deficit at 2.4% of GDP in 1QFY18 is a four-year high,” Ind-Ra said.

Also with inflation inching up, despite the clamour for further monetary easing, the Reserve Bank of India (RBI) will have less elbow room to reduce policy rate further.

“Moreover, a further reduction in policy rate is unlikely to make much of a difference, particularly on the investment front, given the large idle capacities in several
manufacturing sectors.”
The space available to the government for an economic packaged is also limited because there is likely to be a shortfall in the budget and expectation of a high dividend from the RBI, money from the telecom auction and disinvestment may not match the budgeted numbers.
“Although Ind-Ra expects the direct tax mop up to exceed the budgeted figure by Rs 20,000 crore and public sector units’ dividend to be higher by Rs 10,000 crore, the revenue shortfall for the government from the budgeted figures works out to be Rs 33,500 crore. If we include Rs 10,000 crore of supplementary budget expenditure passed in the parliament so far, then the shortfall increases to Rs 43,500 crore. This will push the fiscal deficit by 26 basis points of GDP, meaning the fiscal deficit would escalate to 3.46% of GDP in FY18,” Ind-Ra.

The rating agency expects the likely fiscal stimulus by the government to push the fiscal deficit further, forcing the government to invoke the ‘escape clause’ citing ‘far-reaching structural reforms in the economy with unanticipated fiscal implications’.

source:http://economictimes.indiatimes.com/markets/stocks/news/india-ratings-cuts-gdp-estimate-citing-demonetisation-gst/articleshow/60857634.cms

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