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India might lose India’s fastest growing economy tag to China

"FY17 GDP number might come down, but FY18 hopefully will not," chief economist of CARE Ratings said.
Large lines outside ATM, Banks at Connaught Place

With the sudden demonetisation announced by Modi government might have taken away India’s claim to being the fastest growing economy in the world, with brokerages and economists revising their GDP growth estimates sharply downward as a result of the cash squeeze created in the economy.

It has been reported that earlier the domestic economy was projected to grow at above 7.5 per cent in FY17, with the International Monetary Fund (IMF) itself raising its projections by 0.2 percentage points this October to 7.6 per cent for 2016-17 and also for 2017-18.

It is to be noted that in July, World Bank projected India to grow at 7.6 per cent in 2016-17. Interestingly, rating agency Fitch earlier this year had projected India’s real GDP to accelerate to 7.7 per cent in 2016-17 and 7.9 per cent in 2017-18.

It was noted that the economy expanded at 7.6 per cent in financial year 2015-16, overpowering China for the second time continuously. However, the latest reports show that after demonetisation, GDP growth projections for the Indian economy for FY17 has slipped to as low as 3.5 per cent. In the light of such rate, it is to be noted that the Chinese economy has been growing at around 6.7 per cent this year for three quarters in a row.

It was on Friday that Broking house Ambit Capital lowered its FY17 GDP growth forecast for India by 330 basis points, as it expects GDP growth to decelerate from 6.4 per cent in the first half of FY17 to 0.5 per cent year-on-year in the second half of FY17 with a distinct possibility of GDP growth contracting in the third quarter.

In a note, Ambit economists Ritika Mankar Mukherjee, Sumit Shekhar and Prashant Mittal said, “The demonetisation-driven cash crunch that is playing out in India will paralyse economic activity in the short term. We expect a strong ‘formalisation effect’ to play out as nearly half of the non-tax paying businesses in the informal sector (40% share in GDP) will become unviable and cede market share to their organised sector counterparts. We expect this dynamic to crimp GDP growth in India in FY18 as well and hence we have cut our FY18 GDP growth estimate to 5.8 per cent YoY (from 7.3 per cent).”

It has also been reported that analysts also scrapped their March 2017 Sensex target of 29,500 and pegged their Sensex target for March 2018 at 29,000.

Madan Sabnavis, Chief Economist of CARE Ratings in an interview with ETNow anticipated that this is a big hit on GDP, but has a little healthier target. He also said that India sees some pain in GDP for third and fourth quarter, but longer term the recovery is well on track and the economy should recover. “So FY17 GDP number might come down, but FY18 hopefully will not,” he added.

Additionally, Brokerage Anand Rathi Securities said that India’s GDP will decline over the next two quarters due to reduction in overall spending. “After a slow rate of GDP growth for around six months, the subsequent two years could see sharp ‘hockey stick’ revival in growth,” it said.

It is to be noted that Amit Mitra,West Bengal Finance Minister had said on Wednesday that the demonetisation move will result in the national GDP losing Rs 25,000 crore each day.

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