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Saturday, January 7, 2017

Impact of demonetisation on GDP growth in this financial year

Globally the cash is the preferred mode of transaction,which is accounting 85% of the total cash on average basis. But in some of the developed countries, the transactions carried out through cash are less than 50% of the total transactions.

This ratio in India is expected to be around 95%. The reason of cash being preferred mode of transaction is that its easy accessibility, certaintity of acceptance and the efficiency as settlement is not dependent on any additional and no ther additional charges make it globally the most preferred mode of transactions.

After the demonetisation by the Modi government, the 85% of cash has put out of circulation. The transactions in the agriculture and related sectors, small establishments, households and among professionals has been disprupted for the short term after the demonetisation.

The liquidity into the system has been slow post note ban that hurting the both formal and informal sector of the country. The incomes in the both formal and informal sectors have been badly affected.

A not of caution also issued by President Pranab Mukherjee on Thursday that the demonetisation by the Narendra Modi government could expectedd to lead a temporary slowdown in the Indian economy and hurt the poor of the country.

The president also cautioned that we all will have to be extra careful that the suffering of the poor could be relieve which might become inescapable for the expected progress in the long term.

The Central Statistics Office of India has just released the prediction of GDP(gross domestic product) growth for this financial year, taking us up to the beginning of April. This shows a slowing to 7.1% in said growth.

Some people are ascribing this to the effects of demonetisation but the prediction is based almost entirely upon pre-demonetisation information.
The GDP growth that seems to be driven by a sharp rise in the government spending and agriculture. The CSO has indicated a sharp slowdown in manufacturing growth in the second half of the financial year 2016-17 to 6.7 percent from 8.1 percent in April-September.

The manufacturing, the government main focus area, has been estimated to slow down to a growth rate of 7.4 percent in the financial year 2016-17 from 9.3 percent in the previous financial year. The industrial growth as a whole, including mining, manufacturing and electricity, is estimated to slow down to 5.2 percent during 2016-17 from 7.4 percent in the previous financial year.

The advance estimates mainly based on industrial production and the bank deposit data available till October and other data, including inflation, government expenditure and subsidies upto November.

The November data was not used to compute financial services data because of outlier of cash deposit flow in the bank. Due to demonetisation in November there was a high degree of volatility in bank deposit data.

The expected growth during the October-December quarter is to be lowest in years, due to spending affected by currency ban. Public administration, defence and other services, largely government spending, estimated to grow 12.8 percent in the financial year 2016-17, about double of its 6.6 percent rate of the previous year.

The agriculture is expected to expand by 4.1 percent in 2016-17 up from 1.2 percent of the previous year. The gross fixed capital formation is estimated to contract by 0.2 percent in 2016-17, against a 3.9 expansion in the previous financial year. The lending rates have also begun to decline with the banks flush with deposits after the demonetisation by the government.

The consumption, the most bright spot in the first half of the financial year 2016-17, appears to shrink. The final consumption of private sector expenditure has been also expected to grow by 6.5 percent during the financial year, the lower than 7.1 percent in the first half.

What the people really want to know is that what will be the effect of demonetisation? The own guess is that there is going to be a slow down in the current quarter of this financial year beacuse we are just entering in the current quarter of this year after demonetisation. But it can be expected a bounce back in the last quarter of the financial year as soon as the new notes finally reach all the corners of the economy. If the growth can drop, it could definetly see up in the next quarter of the fiscal year. Then we can expect a small but the permanent step up in the growth rate into the future.

The interest rates are being cut because of so much of the black money has taken back into the banking system of the country. This is not happend because of RBI has changed the base rates, this is the evidence of the an increase in the efficiency of the financial sector, which has something long lasting effects over the growth in the country.

We all expct the outcome to be beneficial for the country and the people will be happier in a few months when growth improves.

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