Global investment bank Nomura has predicted India’s economy to register a 7.5 per cent growth rate in 2018, saying it is on the cusp of a cyclical recovery. India’s Gross Domestic Product (GDP) growth bottomed-out in the second quarter of 2017 at 5.7 per cent year-on-year, rising to 6.3 per cent in the third quarter, it said. It has forecast 6.7 per cent in the fourth quarter and a full-year growth of 6.2 per cent this year, rising to 7.5 per cent in 2018, it said. “We remain bullish on India’s macroeconomic outlook,” Nomura said in its Asian economic outlook 2018. The Indian economy is on the cusp of a cyclical recovery and the government has continued to implement structural reforms and prudent macro policies, the tangible benefits of which may be harder to pinpoint right now, but over time will be positive for growth, it said in the report. Higher crude oil prices and state election results are the main risks, it said. Given the base effects, Nomura expects the growth in the first half of 2018 to be at 7.8 per cent, higher than the 7.1 per cent of the second half of 2017. “Further out, we expect a growth of 7.3 per cent in 2019 – a solid print, aided by manufacturing and private services on the supply side and investment and private consumption on the demand side,” the report said. It listed out factors supporting a strong growth. It would be the normalisation of Goods and Services Tax- related supply disruptions; the positive effects of bank recapitalisation, a positive remonetisation impulse and a positive fiscal impulse. The GST council was addressing the supply disruption concerns, it said. The council has raised the eligibility limit under the composition scheme, extended the dates for filing returns, disbursed pending refunds, allowed duty-free sourcing of materials for export until March 2018 and lowered GST rates.
As a result, Nomura said it expected small and medium enterprises (SMEs) to ramp up production, exporters to benefit from the stronger global export upcycle, import substitution to reverse and growth to jumpstart. “2018 should be 2017 in reverse,” it pointed out. The government’s comprehensive recapitalisation plan (recap) for public sector banks (PSBs) worth Rs 2.11 trillion (1.3 per cent of the GDP) in financial year 2018 (year ending March 2018) and financial year 2019 should enable the process of balance-sheet deleveraging. The resolution of non-performing assets (NPAs) was slow as a lack of capital dissuaded public sector banks from writing off bad loans. But as these are now being written off, firms’ excess leverage should decline, setting the stage for a capex revival over time, according to the report. Additionally, Nomura estimates that Rs 700-750 billion of the recap package will be available as growth capital, which should enable banks to extend additional loans worth 7.3 to 8.3 per cent of outstanding credit (assuming a leverage ratio of 8-9x). This should ensure sufficient funding for borrowers with no leverage (consumers), where reforms are ongoing (public capex projects) and ensure it is not denied to those in need (SMEs), it said.
The reflationary effects of remonetisation are yet to be seen. It estimates that real M1 money supply growth will rebound from a contraction of 5.3 per cent year-on-year for the 12-month period ending September 2017 to growth of 13.2 per cent for the year ending September 2018. Changes in real M1 growth lead changes in real non- agriculture GDP growth by around one to two quarters as it captures transaction demand for money. Hence, the expected jump in real M1 money supply should boost non-agriculture GDP growth, especially in the first half of 2018. “We expect cash-intensive sectors such as manufacturing, construction, real estate, trade, transport, hotels and communications to benefit most,” Nomura added.