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India was supposed to be the 'fastest growing major economy' at the start of 2016-17. However, the International Monetary Fund (IMF) has cut its GDP growth forecast for India by a full percentage point to 6.6%.
The important factor for revising GDP growth estimate was demonetisation. On November 8 2016, the government announced the demonetisation of all Rs 500 and Rs 1,000 notes. Since then, its impact has been felt across all sectors of the Indian economy.
Sectors highly reliant on cash transactions ranging from daily consumables, jewelry and real-estate are likely to be the hardest hit. Consumer spending has drastically reduced with people opting to save cash due to uncertainty. Agriculture has been adversely impacted since farmers have been unable to sow Rabi crops due to cash deficiency. All this has led to a snowball effect impacting various sectors of the Indian economy.
The informal sector has been badly affected due to its dependence on cash. The informal sector contributes to 20% of GDP and 80% of employment in India. Lack of access to banking facilities amongst the rural population has further complicated matters. Despite the government's push towards zero balance accounts for the poor, growth of branches has been low. The number of bank branches stands at 7.8 per 100,000 people in rural areas, a marginal increase from 5.3 in 2001.
All eyes will now be on the GST rollout in July 2017. A timely and efficient implementation of the GST will be crucial in cushioning the impact of demonetization. The real benefit of GST comes from a 'level playing field'. A common floor tax across India means that the most efficient producer will win the consumer.
The Union budget of 2017-18 is also eagerly awaited. There are expectations that the government will revamp the income tax structure to improve consumption. Agriculture is expected to get a major boost to compensate for the losses suffered due to the cash crunch.
The different projections from different institutions have added to the confusion about the likely impact of demonetisation. The picture will be clear once the corporate earnings are out for the third quarter of 2017. It will most likely be a precursor to what lies ahead for the Indian economy in the near term.
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