With the RBI reducing its fore-cast of economic growth for the financial year to 7.1 per cent – down by as much as half a percentage point – and others also now talking of a downgrade, the short term adverse effects of demonetisation are becoming all too obvious. Factories are reducing shifts, traders are inactive and consumers are cutting back. To make matters worse, the spectre of deflation is looming large as demand contracts. People are holding back on everyday use of whatever currency notes they have managed to get hold of, except for immediate and urgent needs. External factors are not helping either. The rupee has weakened against the dollar and oil prices have worryingly doubled from the low of $27 a barrel they hit in February this year.
Clearly, the feel-good element, which had dominated the Indian economy ever since prime minister Narendra Modi took over in 2014, is under threat. The situation has been exacerbated by the uncertainty surrounding the goods & services tax, which was supposed to boost GDP growth by at least 1 per cent. States, led by west Bengal and Kerala, are now unwilling to play ball. Their argument is that the centre has to compensate the states for any shortfall in revenue, the referral base year being 2015-16, when growth and revenue collections were buoyant.
If demonetisation results in a slowdown in the economy, revenue growth would take a hit. But the states would still need to be compensated on the basis o