ET Intelligence Group: The demonetisation move has squashed hopes of economists that favourable monsoon and seventh pay commission-related wage hikes would result in strong consumption demand in the second half of the current fiscal.
The cash crunch due to the removal of nearly 86% of currency in circulation is expected to hit the consumption demand directly.Trade, farming and investment activities are also likely to be affected. Not surprisingly, in the aftermath of demonetisation, there has been a slew of downgrades to India's GDP estimates for the current fiscal -ranging anywhere between 10 basis points (bps) and 330 bps -by various economists.
The impact of demonetisation is expected to be significant in the short term given the rising importance of the consumption theme in the Indian economy over the last two years as investment-linked activities have taken a back-seat.
Public and private consumption has supported the GDP growth in the past year, more so in the past two quarters. Its contribution to incremental economic activity rose to 82% in the September quarter from about 43% in the corresponding quarter two years ago.Against this, investments as repre sented by gross fixed capital formation (GFCF) contracted over the past three quarters.
In the S&P BSE 200 index, a set of 46 consumption-driven companies has outdone 28 investment and industry sector counterparts by reporting superior earnings growth since FY15. The basket of consumption companies accounted for close to 53% of total earnings of this subset of 74 companies in FY16 from 39% in FY14.
In addition, the credit growth in the banking sector is driven by personal loan portfolio, while industry demand for loans has taken a beating. According to the RBI's data on fortnightly sector deployment, personal loans have not only clocked in higher double-digit growth, but their contribution in total non-food credit has also increased to 23% from 20% over the past two years.
Source: economictimes.indiatimes.com