India’s gross value added growth is likely to be at 6.6 per cent in 2016-17 as economic activity will take more time to normalise following the government’s move to demonetise high-value notes, Icra has said. “Although currency liquidity is likely to improve significantly by the end of January 2017, economic activity may take longer to normalise, based on which we have revised our forecast for GVA growth in 2016-17 to 6.6 per cent,” the domestic rating agency said in a report.
It said the pace of revival of economic activity in the fourth quarter of the current financial year is likely to take a cue from how quickly currency in circulation gets replenished and digital transactions become more widespread.Between November 10 and December 19, banknotes of Rs 5.9 trillion were issued to the public through the banking system, as indicated by the Reserve Bank, equivalent to an estimated 38 per cent of the value of currency that ceased to be legal tender.
RBI has also clarified that it has issued 22.6 billion notes of various denominations to the banks for distribution, including 20.4 billion in small denominations (Rs 10, Rs 20, Rs 50 and Rs 100) and 2.2 billion of Rs 500 and Rs 2,000.”The loss of income in some sectors and deferral of consumption is likely to weigh on capacity utilisation in the second half of 2016-17, delaying capacity expansion plans of the private sector,” the report said.
If this pace of release of cash is maintained and the proportion of fresh notes in different denominations remains the same, currency liquidity is likely to improve considerably by the end of January 2017, prior to the presentation of the budget for 2017-18 and the next monetary policy review, the agency said.
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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.
It felt that over the medium term, the note ban and the focus on digital transactions are likely to reduce competitiveness of the unorganised sector, to the extent that the latter drew strength from lower effective taxation.According to the provisions of the Goods and Services Tax (GST) Constitutional Amendment, GST needs to be implemented before September 16, 2017, which would dominate the economic landscape.The final tax rates for different categories of goods and services will affect price movement after shift to GST, which may result in either delays or upfront purchases during the transition.
The process of providing input tax credit — both on central levies and across state borders — is expected to be more efficient in the new regime, it predicted.The reduction in the prevailing cascading effect is likely to improve competitiveness of the organised sector.
“Regardless of the date of implementation of GST, the key theme over 2017 is going to be a shift from unorganised to organised sectors, both on account of GST as well as the focus on digital transactions,” the report noted.