Mumbai: Even as the Central Statistics Office (CSO) on Friday revised downwards the GDP growth estimate for the current financial year to 7.1%, SBI Research pegged it further down at 6.7%, citing the note-ban impact on consumption and therefore production.

The report said even though an objective assessment of the demonetisation exercise on output growth is a difficult one now, it expects GDP growth to be decisively lower than 6% in the third quarter and in the fourth quarter, it could only make a gradual comeback, it said.

The report estimates GDP growth for the second half and for the full year at 6.3% and 6.7%, respectively with a downward bias. “Our assessment of a 6.7% GDP growth (in FY17) with a downward bias is based on the premise that the liquidity shock has led to a drastic consumer spending shock," an SBI Research’s Ecowrap report said.

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It said even as RBI has replaced around 44% of the banned currency, the money is not coming back decisively into the financial system as people are averse to spending. “This, in turn, is leading to a vicious cycle of banks being unable to replenish cash thereby precipitating the shock."

Earlier in the day, the CSO pegged GDP growth at 7.1%, from 7.6% in 2015-16, mainly due to slump in manufacturing, mining and construction sectors. However, the data did not factor in ‘volatile’ post-demonetisation figures. The report said the service sector growth rate is indeed having a significant downward bias. It said sectors like construction, real estate, cement and FMCG are likely to witness a double-digit decline in sales in the third quarter. The possible solace could be that the companies in the construction sector with a high share of government orders are likely to be less impacted, it said.

“On the whole, the upside to a lower than anticipated GDP estimate in the current financial year will give the government a first mover advantage in terms of a higher than normal trend nominal GDP in the financial year 2017-18." This may allow an absolute expansion in fiscal deficit numbers for the financial year 2017-18, without harming the fiscal deficit ratio in totality, it added.

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