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The economy moved gradually to a near three-year low in the last three months of 2016 due to a decreasing demand, following Prime Minister Narendra Modi’s surprising decision to ban high-value currency notes, according to economists.  

Modi announced the removal of 500-rupee and 1000-rupee notes on November 8, which slashed-off about 86 percent of the currency in circulation, sending the activity on the skids in a predominantly cash-reliant economy.

Based on the poll of 30 economists taken last week, India’s gross domestic product growth had slowed about 6.4 percent on an annual basis in a span of October-December quarter. Hearing this, the currency ban effect remained unclear for several economists.

During July-September quarter, the economic growth gained about 7.3 percent from a year ago, making it the fastest-growing major economy worldwide.

If the analysts’ consensus estimate is met, that title will be lost to China and marked the country’s growth at its lowest since March 2014, considering China’s economy settling at 6.8 percent growth during the same period.

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"GDP is going to underestimate the actual impact of demonetization, simply because the major impact will be on the informal sector which does not get captured in the quarterly estimates," economist Nikhil Gupta said.

Demonetisation Affects Economic Activity

Ahead of the expected 6.4% slowing in GDP growth in the wake of demonetization, 12 economists out of 34 have said that the move would certainly affect the economic activity for the first six months of 2017.   

The 34 economists’ suggests that the impact of the move to demonetize nearly 86% of the liquidity is likely the reason for a gradual growth, citing some of those surveys are still unsure of the decision’s may bring.

Economist Nikhil Gupta said that the GDP of the country would “underestimate the actual impact of demonetisation” due to the influence on the informal sector, “which does not get captured in quarterly estimates”.

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However, among 34 economists on the poll, 13 of which expects only the current quarter to be affected, while 12 were expecting it to affect at least the first half of 2017.

Conclusion

Given the country’s demonization, it is expected that the country is potentially exposed to bigger challenges to the Indian economy, along with a low capital expenditure in the private sector.

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