Demonetization's impact on GDP 'clearly negative': Fitch

The impact of the government's demonetization move is going to be clearly negative, Fitch Ratings said in a research note on Friday.

"The impact on GDP growth is clearly going to be negative in the short run and depends to a large extent on how long the cash crunch is going to take," Thomas Rookmaaker, Director, Fitch Asia Pacific Sovereigns Group, said, in the note. 

Prime Minister Narendra Modi rendered the old Rs 500 and Rs 1,000 notes illegal from November 8 midnight, save at certain government-approved places, where the notes could still be used as a legal tender till the deadline. The announcement saw serpentine lines outside banks and ATMs, and post offices, to exchange, deposit or withdraw money, while banks grappled with the removal of the decommissioned bank notes from the system and loading their cash registers and ATM trays with smaller denomination notes and with new Rs 500 and Rs 2,000 notes. 

The move sought to suck out nearly Rs 14 lakh crore from the system. So far the banks have seen Rs 5.11 lakh crore in deposits and about Rs 1 lakh crore has gone back into the system by withdrawal or exchange of the currencies. 

With cash being in adequate supply but distribution being a problem, as claimed by the government and the RBI, several businesses across sectors have taken a hit in the aftermath of what was initially called Modi's 'boldest move' against black money, but has now drawn criticism and ire from experts, economists, and the all-mighty Opposition at the Winter Session of the Parliament. 

Rookmaaker listed out several macroeconomic effects of decommissioning the old Rs 500 and Rs 1,000 notes, including "a temporary delay of consumption and investment, disrupted supply chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues," he said. 

While several research agencies have spoken about the likely negative impact that the government's move to remove 86% (in value) worth of currency may have, on the GDP, some say that it may even lose its fastest growing economy tag to China again.

Rookmaaker, however said, "We still expect India’s GDP growth to trend higher than China’s in the medium term. "A significant decline in the growth number for this quarter is highly likely, but for the fiscal year as a whole the decline may still be relatively moderate," he said. 

We expect India's GDP to accelerate in FY2018 on the back of reform implementation, monetary easing of the past year and infrastructure spending, while in China a continued increase in leverage in the broader economy is more and more becoming a burden for growth, he added in note said. 

Speaking about the cash crunch situation, Rookmaaker said, "People find inventive ways around the cash crunch as well - there is always the art of jugaad."