In the Move towards a Cashless Society India’s GDP Growth Slumps*
India’s GDP growth in the first quarter of 2017 slumped dramatically to 6.1%– its lowest level in two and a half years, the federal Central Statistics Office (CSO) said late Wednesday.
The surprise drop in the growth rate pulled India from its status as the world’s fastest growing economy.
India’s Central Bank (RBI) is expected to maintain its December 2016 policy to keep interest rates at 6.25% despite the latest economic figures.
Most economic experts say the drop in GDP growth in the period between January and March is directly as a result of the government’s demonitization drive initiated by Prime Minister Nadrendra Modi.
There had been a public backlash against Modi’s “essential” move on November 8 to end the use of the 500 and 1,000 rupee currency notes in order to tackle graft in the country and crack down on unknown sources of income, what he called black [unaccounted for] money.
At the time, economist Subhanil Chowdhury wrote that the huge monetary shock from demonitization to the economy has both short-term and long-term effects.
“The biggest impact of this demonetisation policy, however, has been on the informal sector and agriculture. India is an economy where around 45% of the GDP is produced in the informal sector providing employment to 80% of the workforce,” Chowdhury said.
In its annual report in January 2017, the World Bank warned that the immediate withdrawal of a large volume of currency in circulation brought upon by demonitization “and subsequent replacement with new notes announced by the government in November contributed to slowing growth in 2016”.
However, it classified India’s economy as “still robust” and forecast that GDP growth would bounce back in coming years.
“India is expected to regain its momentum, with growth rising to 7.6% in Fiscal Year(FY) 2018 and strengthening to 7.8 per cent in FY 2019-20,” the report went on to say.