India’s chaotic move to replace most of its cash could slam the brakes on its red hot economy.
The country overtook China as the world’s fastest growing major economy this year, but may fall behind again as the withdrawal of big rupee notes hurts business activity.
Analysts estimate India’s shock decision to scrap its 500 rupee and 1,000 rupee notes — accounting for about 86% of cash in circulation — will shave at least 1% (and possibly much more) off India’s current GDP growth rate of 7.1%.
“A 3% dip in the growth rate [for the current financial year] wouldn’t surprise me,” Pronab Sen, India’s former chief statistician, told CNNMoney. Sen is country director for India at the International Growth Centre in London.
If that happens, India would almost certainly lose its crown to bigger rival China.
“The impact on GDP growth is clearly going to be negative in the short run,” said Thomas Rookmaaker of Fitch Ratings.
How big a hit the economy will suffer “depends to a large extent on how long the cash crunch is going to take,” Rookmaaker added.
