Demonetisation to lower GDP growth by 0.3-0.5%: CARE Ratings

Abolition of Rs 500 and Rs 1,000 notes is likely to lower GDP growth by 0.3-0.5 per cent in the current fiscal as business in various sectors is expected to get adversely affected, says a report.
According to CARE Ratings, while services and manufacturing sector would be impacted most from the move, the measure is positive for the banking sector and agriculture is expected to be the least impacted.
In an attempt to curb black money menace, Prime Minister Narendra Modi-led government recently withdrew Rs 500 and Rs 1,000 notes as legal tender. It has instead introduced new Rs 500 and Rs 2,000 notes.

The credit rating agency noted that the move is expected to have a significant effect on the economy, particularly on the GDP growth prospects "as various sectors would tend to get affected differentially on this score".
Prior to the demonetisation, CARE had estimated a GDP growth of 7.8 per cent for 2016-17.
However, post-demonetisation, it has now projected that "the overall GDP growth would be affected by 0.3-0.5 per cent".

According to CARE, the services sector is expected to be affected the most, mainly on account of losses in trade, hotel and transport, among others, due to the volume of cash transactions involved in these economic activities.

"Importantly, these losses, due to their inherent nature, can't be recovered in the next quarter," it added.
The agency also noted that SMEs will have a major problem in adjusting production schedules as both payments and receipts flow are in cash given their structures.
"For the rest of manufacturing, demand side issues would exist till such time that conditions stabilise and could get reversed in the fourth quarter," CARE said.
"Hence, the industry is also expected to be impacted which will be more significant in the first 2-3 weeks post the announcement," it added.
On the positive side, the agency noted that banking sector stands to gain from the move due to the increase in deposits, which will be somewhat countered by a slowdown in other sectors like real estate.

Interestingly, it noted that agriculture is expected to be least impacted with major shock being absorbed in the first 2-3 weeks itself as there have been issues in sales at mandis due to the current cash crunch.