India expects growth to slow to 7.1%

KOLKATA—India said its economic expansion could slow to 7.1% in the year ending March 31 from 7.6% a year earlier, though analysts warned that this estimate probably doesn’t reflect the full impact of Prime Minister Narendra Modi’s move in November to cancel almost 90% of the country’s cash.
The projection for gross domestic product was released a month earlier than usual to accommodate the government’s decision to bring forward the annual budget announcement to Feb. 1.

As a result, the growth estimate wasn’t calculated using data from after the cash invalidation on corporations’ earnings, industrial output, government spending and others. Those won’t be available to statisticians until later.

Friday’s number should therefore be read “with extreme caution,” said Anubhuti Sahay, head of India research at Standard Chartered PLC.
The Central Statistics Office is scheduled to release another, more-complete forecast of annual GDP on Feb. 28. But even that estimate might not fully capture the effect of the cash crunch on India’s vast and hard-to-measure informal economy.

“Much of the data for the post-demonetization [period] is yet to come,” said G.C. Manna, director-general of the Central Statistics Office. By the time the next estimate is released, he said, the effect of the cash ban “will be clearer.”

Friday’s GDP estimate represents the first official data covering the full breadth of the economy to be released since Mr. Modi abruptly voided all 500- and 1,000-rupee notes ($7.40 and $14.70) in November to drill out cash piles held by tax cheats and bribe-taking bureaucrats. But signs had been pointing to a sharp slowdown.
Factory activity shrank in December for the first time in a year, according to the Nikkei India Manufacturing Purchasing Managers’ Index. Nearly all of the country’s car and motorcycle makers reported a year-over-year decline in shipments for the same month.

According to the Centre for Monitoring Indian Economy, the number of new investment projects announced in the final quarter of 2016 was the lowest in more than a decade.

Many economists have cut their growth forecasts for the year ending March 31 to between 6.5% and 7%, down a percentage point or more from before November.

In a New Year’s Eve address, Mr. Modi defended the cash cancellation, lauding the sacrifices citizens had made for the sake of punishing the corrupt. “Indians have, with firm resolve and infinite patience, faced difficulties with a smile,” the prime minister said. “They have shown how much even people trapped in poverty are willing to do to build a glorious India.”
Yet with banks still struggling in many places to keep branches and ATMs stocked with replacement cash despite strict limits on withdrawals, the difficulties may not prove so temporary.

Sanchit Munjal’s footwear company in Agra, Srijati Shoes Pvt. Ltd., has seen demand fall by 20% since November, with smaller towns and cities seeing the largest drops in sales. He expects to keep his production throttled back for at least another six months.

“Until and unless cash reaches the common man for small purchases, things aren’t going to be normal,” Mr. Munjal said. “You don’t call it normal when you see someone crying in the hospital because whatever cash he has, he can’t change it at the bank or use it to treat his sick kid.”

Pushcart produce vendors say they have had to cut prices to accommodate their customers’ attenuated purchasing power. Making change can also be tough.

“What can we do if a person comes with a 2,000-rupee note?” asked Daleep Kumar, a vegetable seller in New Delhi, referring to one of the newly issued bills, worth almost $30. “We can’t give away all our lower-denomination notes for small purchases. We refuse to sell at times.”

The shortage of timely official data on vendors such as Mr. Kumar, tiny workshops and others in the informal economy “has been an issue of concern in India for a long time,” said Madhavi Arora, an economist at Kotak Mahindra Bank in Mumbai.
Government statisticians in India survey small-scale businesses in detail only every couple of years. In between, for purposes of estimating GDP, they assume that the informal economy grows at roughly the same pace as the formal one, as measured by indicators such as sales-tax collections and corporate revenue. India’s current GDP numbers use a survey of informal businesses completed in 2011.

“At this point, we’re all working with patchy data,” said Pranjul Bhandari, chief India economist at HSBC. “It’s difficult to tell what the exact drag on the economy has been. I don’t think we’ll have a grip on that for a while.”