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, rating agency 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.

It said the pace of revival of economic activity in the fourth quarter 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 ₹5.9 lakh crore were issued to the public through the banking system, as indicated by the Reserve Bank, equivalent to 38 per cent of the value of currency that ceased to be legal tender.

“The loss of income in some sectors and deferral of consumption are likely to weigh on capacity utilisation in the second half of 2016-17, delaying capacity expansion plans,” the report said.

If this pace of release of cash is maintained and the proportion of fresh notes 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.

Pace of spending 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 hereon.

It felt that over the medium term, the note ban and the focus on digital transactions are likely to reduce the competitiveness of the unorganised sector, to the extent that the latter drew strength from lower effective taxation.

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