India’s slowing growth blamed on ‘big mistake’ of demonetisation

India has posted its slowest growth rate in two years, ceding its status as the world’s fastest-growing major economy to China, with economists blaming the downturn partly on last year’s shock decision to recall the country’s two highest-value bank notes.

Analysts said the 6.1% GDP growth figure for the January to March quarter – compared with China’s 6.9% – reflected a general economic slowdown in the south Asian giant, compounded by the shock demonetisation of 500 and 1,000 rupee banknotes, worth approximately £6 and £12.

The move led to months of acute cash shortages across India that hit the country’s manufacturing and construction sectors particularly hard, the former recording slower growth than in the same period last year. The construction sector contracted by 3.7%.

The cash recall was intended to hasten the country’s transition towards a formal economy and close down the booming economy of untaxed cash transactions, which aid corruption, the funding of terrorist groups and keeps counterfeit notes in circulation. It was also expected to unearth stashes of untaxed wealth in a country where just 1% pay income tax.

India’s Reserve Bank is yet to say how much “black money” was deposited in banks but early indications suggest it was less than expected.

Gurchuran Das, an economic commentator, said the lagging growth was well below the rate India required to create enough jobs to match the number of new entrants to the workforce, estimated to be roughly 1 million people a month.

“It shows that demonetisation was a big mistake,” he said. “What this has done is put us back about six months. We should have been inching towards 8% annual growth, but have ended up around 7.1%.

“We’ve really got to be at 9% growth to create the jobs we need,” he said. “Already we were having problems creating those jobs, but demonetisation has exacerbated it by a couple of quarters.”

He said the economy had bounced back after cash shortages eased in January and the country was likely reach 8% growth in the next three to four years, a prediction shared by the global ratings agency Moody’s.

Arvind Subramanian, India’s chief economist, said the reduction in growth was “quite expected” after demonetisation, and that the replenishment of cash stocks and the monsoon period would help the economy rebound.

Growth in India has been slowing since the middle of 2016, according to HSBC, but Das said the country’s economy was generally wellmanaged. “The inflation rate is the lowest it’s been in five years, the fiscal deficit has come down, and India has in fact become the largest destination for foreign investment in the world,” the former CEO of Procter & Gamble India said.

He added that the key to creating high-productivity jobs in the formal sector was expanding India’s share of global exports, currently around 1.7%.

India is preparing to introduce a national goods and services tax in July that is expected to make the country a more attractive destination for foreign investment, cut red tape for business and increase trade between states. But Moody’s has warned the country needs to further reduce debt levels if it hopes to boost its international credit rating, currently just above junk status.

Although the implementation of demonetisation was seen as botched by some, the policy is thought to have been a political coup for the Indian prime minister, Narendra Modi. In March, he decisively won an election in India’s largest state that was seen as a referendum on the scheme.

Courtesy Newsrep