Rate, amount of black money regeneration to define ‘new normal’ of GDP growth

Demonetisation of higher denominations in India has led to a short term state of paralysis as in the fight against black money, the purchasing power of the people has also been curtailed.

“As the government, has put limitations on cash exchange, cash withdrawal which has led to decline in demand of consumer goods/non-essential items and other luxury items,” J N Gupta and Gaurav Bansal, analysts from Stakeholders Empowerment Services (SES) said in a report dated November 18.

After assessing the permanent loss of purchasing power on account of lost black money the government will gradually loosen the strings on the current cash crunch after 30-45 days which will define a ‘new normal’ depending on the black money regeneration, the report said.

“The new normal will be decided by quantum of permanent loss of purchasing power lost due to loss of black cash. Whether new normal later recovers to the old normal will depend on whether black cash gets generated or not and if it gets generated then at what pace. Time will only tell the growth of money in unaccounted sector and a lot will depend on how the government tackles the generation of new black money,” SES analysts said.

There has been a decline in demand of consumer goods and non-essential commodities, mainly on the back of unaccounted cash transaction in the black market.

This in turn would impact the production of goods and services in the economy and finally the growth rate of Gross Domestic Products (GDP), the report said.

Impact of demonetisation on India’s Gross Domestic Product has already proven to be troubling in nature with FY18 GDP rate cut down to 5.8% and possible 0.5% slower growth rate in FY17.

However, the accounted sectors of the economy will push GDP growth in the medium to long term as there will be an increase in banking transactions and card transactions, increase bank deposits and increase in tax revenue.

The government has given a deadline on the cash deposits of old currencies in bank accounts by December 30 and restricted exchange of old notes up to Rs 2,000 only.

This further adds to the black currency that will no longer be in circulation.

“…to tackle decline in GDP on account of demonetization, the best way would be to use the funds in a prudential manner for infrastructure and social projects with tangible benefits. Both will result in GDP growth,” the report added.