Crash Crunch can make India “not” the fastest growing economy

Economy - Akanksha Singh - Nov 30,2016

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indian economy falters after the cash crunch

Narendra Modi led government’s demonetization has the capacity of snatching India’s crown as the fastest growing economy

India took over China’s place as the fastest growing major economy this year, but might fall short of its promise of a 7.1% GDP growth rate after the ban of its ‘big’ currency notes. Being a country where at-least the 86% of cash in circulation are the ‘big’, 500 and 1000 rupees notes, it occurs that India has chances of shaving a minimum of 1% from its growth rate, bringing it down to second China as the fastest growing economy.

Pronab Sen, India’s former chief statistician told CNN Money, “I wouldn’t be surprised if the growth rate dips as far as 3%.”

The end to this crisis is nowhere in sight, according to the Reserve Bank of India (RBI), old cash accounting to over 5 trillion ($74 billion) has been sucked out of the market since Prime Minister Modi’s shocking announcement on November 8. So far, the new 500 and 2000 notes have been able to replace only 1 trillion rupees ($15 billion), equivalent to only 7% of the said cash. The new notes being too small for the ATM are taking far too long to circulate in the market, since the ATM machines need to be refitted which could take weeks.

In a country where almost 90% of transactions happen through cash, it is only obvious that the shock will reverberate for long, shaking the whole economy by its foundations. Sectors such as construction, property and retail rely heavily on cash as the major source of transaction contributing to about 30% of the GDP, according to the Institute of International Finance. A major hit to these particular areas of economy can further bring down the total GDP by 2%.

Ever since the announcement, Indian markets have been heavily affected, the rupee has gone down to hit the 52 weeks lowest, a record low of 68.86 to the US dollar as recorded on Thursday.