Demonetisation effect: Fitch Ratings lowers GDP growth forecast to 6.9% in FY17 from 7.4%

Fitch Ratings today lowered India's GDP growth forecast for this fiscal to 6.9per cent from 7.4 per cent, saying there will be temporary disruptions toeconomic activity post demonetisation.

 It said economic activity will be hit inthe October- December quarter because of the cash crunch created by withdrawaland replacement of 500 and 1000 rupee notes that accounted for 86 per cent ofthe value of currency in circulation.

Indian growth has also been revised downto reflect temporary disruptions to activity related to the RBI's surprisedemonetisation of large-denomination bank notes, Fitch said, as it revised realGDP growth forecast down to 6.9 per cent for 2016-17, from 7.4 per centprojected earlier.

The US-based ratings agency also revised GDP growth forecastfor 2017-18 and 2018-19 lower to 7.7 per cent from 8 per cent earlier.

Gradualimplementation of the structural reform agenda is expected to contribute tohigher growth, as will higher real disposable income, supported by an almost 24per cent hike in civil servants' wages. But the anticipated recovery ininvestment looks a bit less certain in light of ongoing weakness in the data,Fitch said in its 'Global Economic Outlook - November' report.

Regardingcurrency ban, it said consumers do not have the cash needed to completepurchases, and there have been reports of supply chains being disrupted andfarmers unable to buy seeds and fertiliser for the sowing season. Time spentqueueing in banks is also likely to have affected general productivity.

 Theimpact on GDP growth will increase the longer the disruption continues, Fitchsaid, adding the medium-term effect of the currency withdrawal on GDP growth isuncertain, but is unlikely to be large. Most importantly, demonetisation is aone-off event. People who operate in the informal sector will still be able touse the new high-denomination bills and other options (such as gold) to storetheir wealth, it added.