Instead of emphasising how far India’s market has come under Prime Minister Narendra Modi’s pro-growth management, Wednesday’s gross domestic product report will underscore just how much there would be to lose on cash from his shock clampdown.
Growth probably accelerated to 7.5 percent in July-September, according to the median of 25 estimates in a Bloomberg survey of economists. Nonetheless, analysts are cutting predictions for growth to 7.4 percent from 7.7 percent for the year through March as Modi’s Nov. 8 move to invalidate 86 percent of currency in circulation dents demand in an economy where 98 percent of consumer payments are in cash.
"Attention has shifted to the effect of the demonetization initiative on the real economy," Radhika Rao, an economist at DBS Bank Ltd. in Singapore, wrote in a report on Monday. Growth in October-December could dip below 6 percent, she said.
India’s standing would be imperilled by such a slow down as the world’s fastest-growing major market. A larger concern, however, is how soon the $2 trillion marketplaces can completely rebound in the results of Modi’s measure.
"Macroeconomic effects of the cash crisis include a temporary delay of consumption and investment, disturbed supply chains, farmers being not able to get inputs, and some loss of productivity due to time lost to deal with cash dilemmas," said Thomas Rookmaaker, director in Fitch Ratings’s Asia-Pacific Sovereigns Group. "The impact on GDP increase is clearly likely to be negative in the short run and depends to a large extent on the length of time the cash crisis is going to take."
Read more: India’s cash turmoil from the numbers
Until May to replace the 23 billion bank notes he’s sucked out by some estimates, Modi may desire. Others, including Morgan Stanley’s Chetan Ahya, estimate that about 98 percent of cash required for trades will be by mid-December in the system. That means consumption -- which accounts for 60 percent of GDP -- will recuperate from the April-June quarter though private investment will take the time to improve, he explained.
Following Wednesday’s GDP data, which will be due at 5:30 p.m. in New Delhi, attention will shift to a purchasing managers’ index due Thursday that will offer a first evaluation of the impact on manufacturing. Services PMI is due Dec. 5 and the central bank will review interest rates Dec. 7.
Governor Urjit Patel will probably reduce the benchmark repurchase rate to 6 percent from 6.25 percent to stop negative spillovers from the shock, according to Citigroup Inc. A personal index compiled by BSE Ltd. and the Centre for Monitoring Indian Economy indicated a sudden surge in urban unemployment this month, as reports poured in of building managers unable to pay their daily-wage labourers.
"In an uncertain economic environment since the demonetization exercise, the December monetary policy must focus on a wise risk management strategy instead of a straightforward growth-inflation trade-off."