DEMONETIZATION: SBI sees GDP growth fall to 6.1%, miss govt projection of 7%

The country’s largest bank, State Bank of India, said today that it expects the growth in India’s gross domestic product to fall to 6.1% or lower in the current year from 7.9% last year due to the impact of demonetization.

It said the projection by government of India’s Central Statistical Office for a GDP growth of 7.1% in the ongoing year was unlikely given the liquidity crunch caused by the withdrawal of 500 and 1000 rupee notes.

“If we go by CSO estimate of 7.1% (FY17), the Q3 and Q4 GDP growth would be around 6.1% and 7.8%, respectively, which is quite impossible given the extent of liquidity shock that has led to a drastic consumer spending shock,” the bank said in a note today.

Instead of growing at 6.1%, India’s GDP growth will be 5.8% in the ‘affected’ quarter of October-December, it said.

“..even after appreciating that an objective assessment of the demonetization exercise on output growth is a difficult one given the mutual interactions, we expect GDP growth to be decisively lower than 6% in Q3 FY17 (5.8%). In Q4 FY17 it could only make a gradual comeback (6.4%),” it added.

The bank, which was at the forefont of the ‘remonetization’ effort after the withdrawal of the currency notes, said things are fast approaching normalcy.

“Now, the situation has almost normalized and we maintain that close to 70% of the extinguished currency will be remonetized by Feb-end.. Demonetization will have short-term negative impact on growth numbers, though in the long-run growth will increase as formalization of economy increases and remonetization happens at a faster pace,” it said.

The precise impact that the withdrawal of notes — a measure targeted at flushing out concealed assets — on economic growth is a hotly contested subject, with some critics of demonetization comparing the move to shooting at the tyres of a car running at 100 miles an hour.

Last year, India had become the world’s fastest growing big economy with growth rate almost touching 8% and China facing its own woes. It remains to be seen if the country can maintain that distinction in the ongoing year, especially if full-year growth dips below 7% as predicted by SBI.