India set for slowest growth period as demonetization dents economy


India seems set for four consecutive quarters of sub-7 percent growth for the first time since at least 2011, as the government's demonetization drive triggers a shortage of cash, Societe Generale said.

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The country's Central Statistics Office amended the way India counted its gross domestic product (GDP) numbers in January 2015, amending the base year to 2011-2012 from 2004-2005.

Under this new series, which dates back to June 2011, India experienced three consecutive quarters of growth below 7 percent between December 2012 and June 2013, according to Kunal Kumar Kundu, India economist at SocGen. If Kundu's forecasts turn out to be accurate, this would mark the first time growth will be below the 7 percent mark for four quarters in a row for the series.

A combination of crimped rural demand, falling capacity utilization and weakening business confidence could result in a far lower growth rate than India would be comfortable with, Kundu said in a note on Friday, starting with the quarter that ended Dec. 31.

SocGen slashed India's fiscal 2017 growth rate to 6.6 percent on-year from 7.3 percent previously. For fiscal 2018, which ends March 2019, the bank expects growth to be 7.2 percent on-year, down from an earlier projection of 7.7 percent.

"We also see the potential revival in already anemic private investment taking far longer than we originally anticipated," Kundu added.

More than 50 days have passed since India introduced its demonetization program in November, impacting 86 percent of India's currency in circulation. The government recalled existing 500 ($7.35) and 1,000 ($14.70) rupee notes and replaced with newly printed 500 and 2,000 rupee notes.

Initial data released in the aftermath showed the drastic slowdown in factory activity, in line with consensus.

Reuters reported the Nikkei/Markit Manufacturing Purchasing Managers' Index fell to 49.6 in December from November's 52.3, its first reading below the 50 level that separates expansion from contraction, since December 2015. Meanwhile, consumer prices rose at annual rate of 3.41 percent in December, their slowest pace since November 2014, said Reuters, and well below the Reserve Bank of India's 5 percent target by end of fiscal 2017.

Analysts reckon subdued consumer prices would leave the Reserve Bank of India with more room to cut rates. SocGen estimates two rate cuts of 25 basis points each for 2017.

SocGen also pointed to a study by the All India Manufacturers' Organization (AIMO), which showed micro and small scale industries suffered 35 percent job losses and a 50 percent decline in revenue in the first 34 days since the demonetization program. By March 2017, those numbers could be as high as 60 percent drop in employment and 55 percent fall in revenue, according to AIMO. These industries usually are very reliant on cash transactions.

The study pointed out factors that contributed to the impact included "zero cash inflow, rules curtailing cash withdrawals, staff absenteeism, a weaker rupee, (and) choked fundraising options," among others, Kundu said.

In his New Year's eve address, Indian Prime Minister Narendra Modi introduced various procedures aimed to cushion the blow from demonetization. They included special provisions for senior citizens, villagers, entrepreneurs and small businesses.

"The very fact that Prime Minister Modi had to announce (systems of procedures) for certain sections of the population, is in itself a tacit admission that the effects of demonetization have been more painful than expected," said Kundu.

He added the impact was likely more severe, since a large number of job losses could lead to a highly stressed household sector and weakening consumption - which are India's main sources of protection against a slowdown.

To be sure, even with the reduced growth projections, India is set to remain one of the fastest growing major economies in the world, growing at more than twice the global growth rate. Some institutions are betting on India to pass key reforms and follow-up actions to them that would ease the way for longer term benefits as demonetization impact ebbs.

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