Demonetisation: Economic growth to take a hit

New Delhi: After ten days of demonetisation, the Indian economy is looking to get hit by at least 50 basis points in just this fiscal year (2016-17) as the rural economy comes to a standstill. Analysts warned that rabi sowing in the rural areas is getting affected, which will impact its agri production in the country. Any impact in agriculture production will result in food shortages and will result in high food inflation.

“In this particular year I am expecting  0.50 per cent impact on GDP. The economic growth rate instead of being 7.5 per cent or 7.6 per cent will probably be closer to 7 or 7.1 per cent,” first Chief Statistician of India and current country director of International Growth Centre (India) Pronab Sen said.

He said that growth will be impacted for atleast 3-4 quarters and one will have to see how long it will come to pre-demonetisation levels.

Economists said that there is a serious problem as the rural sector will be hit the most by the current liquid crunch. While rural India for-ms 40 per cent of India’s GDP, what is crucial is that informal sector employs 80-82 percent of people in the country.

“The rural economy is cash economy and farmers use cash to buy seeds and fertlisers and other agri inputs. The Rabi season is on and it is a limited window period, if a farmer misses the crop cyle it will impact net net sowing and will impact harvesting,” said Sunil Kumar Sinha, principal economist at rating agency India Ratings and Research.

He said that demonetisation could not have come at a worst time for the farmers as they prepare for sowing.

A drop in harvesting will bring down the rural income which will impact consumer dur-able and non-durable sectors. Other area where demonitisation is impacting is informal financial sector which provides loans in villages, which are still out of banking sector.

“The informal sector works today largely on the basis of money sourced from the informal financial market which is the money lender, chit funds and hundis among others. The bulk of the affect that you are going to see is going to be precisely on the stock of cash that is being held by these financial institutions. Now that money goes down, it is not going to get replenished in a hurry. So the informal sector is going to be negative impacted for a long time,” said Dr Sen.

Meanwhile the middle class of  the country is split over the demonitisation move with some criticising the government for poor implementation, while others applauding Modi.