India’s GVA growth likely to be at 6.6% in FY2017: ICRA

26 Dec 2016 Evaluate

Domestic rating agency, ICRA in its latest report has said that India’s gross value added (GVA) growth is expected to be at 6.6% in FY2017, following the government's surprise move to demonetise high value currency notes, as economic activity will take longer time to normalize from the demonetization effect. It also noted that currency liquidity is expected to improve significantly by the end of January 2017.

Report has stated that as per the Reserve Bank of India (RBI), banknotes of Rs 5.9 trillion were issued to the public through the banking system, between November 10, 2016 and December 19, 2016, which equals to a projected 38% of the value of currency that ceased to be a legal tender. As per RBI it has issued 22.6 billion notes of various denominations to the banks for distribution, including 20.4 billion notes in small denominations (Rs 10, Rs 20, Rs 50 and Rs 100) and 2.2 billion notes of Rs 500 and Rs 2,000. Therefore, it said that if this pace of release of cash is maintained and the proportion of fresh notes in different denominations remains the same, currency liquidity is expected to improve significantly by the end of January 2017, prior to the presentation of the Budget for FY2018 and the next monetary policy review.

According to the report, in the second half of 2016-17 the loss of incomes in some sectors and deferral of consumption is likely to weigh upon capacity utilisation, delaying capacity expansion plans of the private sector. It added that while there is substantial headroom for the government to incur capital spending, with only around half of the budgeted target completed in the first seven months of this fiscal, it is unclear whether the pace of spending will improve meaningfully in the remainder of the year.

Rating agency further said that due to the note ban and the focus on digital transactions, the competitiveness of the unorganised sector is expected to reduce over the medium term, to the extent that the latter drew strength from lower effective taxation. It also said that, according to the provisions of the Goods and Services Tax (GST) Constitutional Amendment, the GST would need to be introduced before September 16, 2017, which would dominate the economic landscape in 2017. It added that regardless of the date of implementation of the GST, the key theme over 2017 is going to be a shift from the unorganised to the organized sectors, both on account of the GST as well as the focus on digital transactions.

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