CS Credit Suisse Group

NEW DELHI—India released economic data on Wednesday that confirmed its place as an outlier in a low-growth world, and Prime Minister Narendra Modi has promised further steps to encourage investment and modernize bureaucracy.

But with his latest step, Mr. Modi has left India's star looking a lot dimmer, at least for the time being.

Three weeks after his government abruptly canceled India's largest bank notes to drill out ill-gotten wealth, companies big and small are reeling from the shock to cash sales, large numbers of the poor remain cut off from wages and the new rupee bills aren't reaching many corners of the country quickly enough.

While government statisticians on Wednesday reported year-to-year GDP growth of 7.3% for the July-through-September quarter, some economists have already cut their growth forecasts for the full fiscal year, which ends in March.

"Currency is like lubricant," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings. "Until the new currency replaces the old and circulation gets restored to the original levels, some loss of economic activity will definitely happen."

Mr. Modi has acknowledged that his move has brought "various new difficulties in our day-to-day lives," as he put it in a recent radio address. But he and other officials have said voiding big bills will ultimately benefit India's economic expansion by disciplining tax cheats and promoting digital payments.

The government's first estimate of annual growth will be released in January. "At this stage there is virtually no data" on which to base a prediction, said T.C.A. Anant, India's chief statistician, on Wednesday.

The cash transfusion is "an unprecedented thing, and it's never been done before on such a large scale," said Faraz Syed, an economist for Moody's Analytics. "In terms of quantifying it, I think it's very early stages."

Some economists have taken a stab at it, though. Their revised growth predictions vary widely, reflecting deep uncertainty about how Mr. Modi's experiment will play out.

If growth slows enough from the 7.6% clocked in the last financial year, India could lose the mantle of fastest-growing large economy. China is targeting growth of at least 6.5% this calendar year.

Analysts at Ambit Capital noted in a recent report that activity would only need to be squeezed by 10% or so between October and December for the quarter's real growth to end up negative. The Mumbai-based brokerage has slashed its growth estimate for the full financial year by nearly half, to 3.5%. India hasn't grown that slowly in more than two decades.

When Mr. Modi invalidated all 500-rupee and 1,000-rupee bills ($7.30 and $14.60) in early November, Indians were suddenly left to buy and transact with less than 15% of the previous cash supply. That crimped sales for everyone from roadside eateries and neighborhood five-and-dimes to auto makers and cosmetics companies.

The effects have rippled outward. Wholesale trade has cratered. Tens of thousands of truckers, short on cash for meals, repairs and other highway expenses, have sat idle. Growers have offloaded vegetables at deep discounts—or left them to rot on the farm.

Many day-laborers and construction workers have gone unpaid for weeks. The cash shortage has sent some of them back to the farming villages they left behind.

"I think Mr. Modi has done a good thing. But I'll tell you the truth: It's hurting the poor very much," said Santosh Kumar Kewat, who mixes cement at building sites in Noida, an industrial suburb of Delhi.

If work remains scarce and the pay unpredictable—Mr. Kewat said a contractor shortchanged him this week, claiming to be low on small bills—then he might hop a train back to his village, where neighbors grow peanuts, mung beans and wheat.

"At least I will be able to eat something," he said.

As many as one-third of the nation's roughly 40 million construction workers could end up making the same choice, said P.R. Swarup, director-general of the Delhi-based Construction Industry Development Council.

How soon the economy springs back depends on how quickly the government can replenish $200 billion in canceled currency in Indians' pocketbooks and cash registers.

Banks and ATMs had disbursed $37 billion in cash as of Nov. 27, largely in the form of newly created 2,000-rupee bills, which are too large for most everyday use. At what Credit Suisse estimates to have been the recent rate of production at India's four official presses, it could take months to print enough new 500-rupee notes to restore consumer spending.

With their earnings now under the taxman's scanner, wealthy Indians might shy away from big purchases for even longer. Rohit Poddar, managing director of Poddar Housing and Development Ltd. in Mumbai, said luxury-property prices could fall by up to 30% over the coming year, particularly in Delhi and northern India.

According to the World Bank's latest estimate, economic activity that is concealed from authorities to avoid taxes, skirt labor protections or dodge red tape made up nearly 21% of India's GDP in 2007. Assuming the share has held steady, that would make India's "shadow economy" bigger than the entire economies of Norway, South Africa or Thailand.

Krishna Pokharel and Anant Vijay Kala contributed to this article.

Write to Raymond Zhong at raymond.zhong@wsj.com

(END) Dow Jones Newswires

November 30, 2016 12:35 ET (17:35 GMT)

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