India sees economic slowdown even without cash ban effects

Bloomberg

India forecasts its growth will slow to a three-year low even before the effects of Prime Minister Narendra Modi’s cash clampdown start to show.
Gross domestic product will grow 7.1 percent in the year through March, the Statistics Ministry said in a statement. However, the numbers don’t consider data from November onward, when Modi shocked the nation by banning high-value bank notes, Chief Statistician TCA Anant said at a subsequent briefing in New Delhi.
The $2 trillion economy is expected to expand 6.8 percent this fiscal year, according to the median estimate in a Bloomberg survey of 18 economists. That’s slower than last year’s 7.6 percent and the 7.7 percent expansion predicted before Modi’s Nov. 8 move.
“The negative impact from the demonetization is yet to be captured,” said Sujan Hajra, chief economist at Anand Rathi Securities Ltd. in Mumbai. “Going forward, we expect significant revision to this estimate.”
Modi’s decision had sucked out 86 percent of currency in circulation in a nation where 98 percent of consumer payments are made in cash. Indians had until Dec. 30 to deposit their worthless bills into bank accounts. The central bank hasn’t yet disclosed how much of money was deposited.
“Given the underlying volatility in bank deposits, for sectors of financial, insurance, real estate and professional services, we took a conscious view to not base projection in November figures due to demonetization,” Anant said. He added that he wouldn’t speculate on the revised estimate — due Feb. 28.
Gross value added — a key input of GDP — is seen growing 7 percent compared with the previous fiscal year’s 7.2 percent expansion. The forecast is dominated by a 9 percent growth projection for services such as financial, insurance and real estate, compared with the previous year’s 10.3 percent. Other services such as trade and telecommunication will grow 6 percent versus 9 percent Manufacturing 7.4 percent versus 9.3 percent Agriculture — the biggest employer — will expand 4.1 percent versus 1.2 percent Construction — the biggest creator of jobs — 2.9 percent versus 3.9 percent Mining will decline 1.8 percent compared with growth of 7.4 percent.
The Reserve Bank of India — which left rates unchanged in December despite lowering its GVA forecast to 7.1 percent from 7.6 percent — will cut the key rate to 6 percent from 6.25 percent this quarter, a Bloomberg survey shows.
The central bank is due to review policy on Feb. 8, a week after the government presents its annual budget for the year starting April 1. “We expect monetary and fiscal policies to be sufficiently expansionary to support growth,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings Ltd. in Mumbai.

‘CASH BAN MAY CUT TAX’
Prime Minister Narendra Modi’s decision to outlaw high-denomination banknotes will boost revenue collections, help India increase spending on welfare projects and cut taxes, a minister said.
Deposits have outstripped loan growth at Indian banks after people started turning in 500 ($7.35) and 1,000 rupee notes that are no longer legal tender following Modi’s Nov. 8 decision to ban high-value currency notes, effectively canceling 86 percent of cash in circulation. That’s helped them lower lending rates with the biggest state-run bank slashing borrowing costs to a six-year low.
“As more and more money is coming into the formal economy, one can look at more attractive tax rates and lower tax slabs,” Power Minister Piyush Goyal said in an interview on Friday. “Even if half the people who were in the informal sector move in to the formal economy and more taxes get collected, more money can be spent on the welfare.”
Modi’s administration, which is set to announce the budget for the year starting April 1, has already offered interest waivers and cheaper housing loans to the poor last week to shore up popularity after his cash ban hurt farmers, low-income households and businesses. So far support for the move remains strong, as people believe it targets unaccounted wealth, however a deeper economic slowdown could turn voters against the ruling party in key polls over the next two months. Gross domestic product will grow 7.1 percent in the year through March, the statistics ministry said in a statement in
New Delhi on Friday, compared with a 6.8 percent median estimate in a Bloomberg survey. Even though the figure doesn’t include the impact of note ban, the latest estimate is still slower than the 7.7 percent expansion predicted before Modi’s Nov. 8 decision to ban bank notes.
The economy is getting back on track after the initial shock and some economists were overplaying the impact of demonetization, Goyal said, adding that automobile sales and cement dispatches had stabilized. The country’s largest carmaker, Maruti Suzuki India Ltd., said sales had risen in December after contracting in the previous month.
Recent data back economists’ concerns that consumption has been hit. The Nikkei Purchasing Managers’ Index signaled December contractions in both manufacturing and the dominant services sector, which makes up about 60 percent of the economy. A private gauge of consumer sentiment has dipped since mid-December and anecdotal evidence suggests job losses in India’s vast informal sector that employs more than 90 percent of Indian workers.
The RBI last month lowered its growth forecasts but kept interest rates unchanged and said more data needs to be analyzed to assess the impact of the currency ban. Gross value added — a key input of the gross domestic product — will grow 7 percent in the year through March instead of the 7.6 percent forecast earlier, it said.