Demonetisation led to slow GDP growth, says Fitch

Indian government’s decision to scrap old Rs 500 and 1,000 notes had a "material impact on spending," as evident from the significant slowing of GDP growth in the first quarter of 2017, said Fitch Ratings.

The agency also warned that if the decline in investment continues at this rate, the growth potential could be at risk.

In its latest Global Economic Outlook (GEO), Fitch said that Indian GDP growth has been "significantly" slow to reach 6.1% in the said quarter, down from 7% in the previous quarter.

This has been the slowest growth rate since fourth quarter of 2013-14.

"Domestic demand accounted for the bulk of the slowdown. It appears that the cash squeeze of November 2016 - whereby the government pulled 86 per cent of cash in circulation out of the economy virtually overnight - finally did have a material impact on spending," it said.

It further added that the effects of demonetisation which have been visible later are "quite puzzling", partly reflecting the challenges of measuring spending in an economy that has a large informal sector.

Comparing the consumption growth in the two quarters, one sees a substantial fall of 4%, from 11.3% to 7.3%.

"More worryingly, investment dipped into negative territory (-2.1 per cent). This partly reflected poor construction activity, which fell by 3.7 per cent, an unprecedentedly low level in recent years," it said, crediting the demonetisation shock for the same.

GEO also added that the recent years have seen a constantly weak investment as a share of GDP, and that "ongoing steep declines could spell risks for medium-to-long term growth potential."

"We do, however, expect investment to gradually pick up from current lows on the back of the transmission of supportive monetary policy of the past two years and stepped- up structural reforms," it said.

As per Fitch, the goods and services tax (GST), which will be rolled out from July this year, will facilitate trade within India and reduce transaction costs. Other than this, rise in public spending on infrastructure is bound to happen, which would boost investment.