After bad news, here is some good news for Modi; Nomura says India’s GDP growth to sharply rebound in second half of 2017

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Published: January 18, 2017 1:37:33 PM

India's growth numbers are likely to slide in the next two quarters, but a sharp rebound is expected in the second half of 2017 as the demonetisation impact will be transitory and not long lasting, says a Nomura report.

 

imf indian economy, india fastest growing economy, india gdp prediction, india gdp 2016, indian economy demonetisation, indian economy 2017, imf india gdp 2017A Reuters poll on Wednesday stated that India’s economy lost momentum in the final three months of 2016 after Prime Minister Narendra Modi’s ban on high-value notes hurt consumption and businesses but it is set to pick up this quarter. (Reuters)

India’s growth numbers are likely to slide in the next two quarters, but a sharp rebound is expected in the second half of 2017 as the demonetisation impact will be transitory and not long lasting, says a Nomura report. The Japanese financial services major has lowered its January-March 2017 GDP forecast to 5.7 per cent and that of April-June to 6.8 per cent, from 7 per cent. For 2016-17, Nomura expects GDP growth of 6.5 per cent as against 7.6 per cent in 2015-16, lower than the official advance estimate of 7.1 per cent. For 2017-18, it expects the figure to be at 7.4 per cent. “While we expect a sharp slowdown in the next two quarters, we also expect a V-shaped recovery in the second half of 2017,” it said in a research note.

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Meanwhile, a Reuters poll on Wednesday stated that India’s economy lost momentum in the final three months of 2016 after Prime Minister Narendra Modi’s ban on high-value notes hurt consumption and businesses but it is set to pick up this quarter. Having posted growth of above 7 percent for six consecutive quarters, India’s gross domestic product is expected to have expanded just 6.5 percent in the October-December quarter – the weakest in nearly three years. The poll also suggested growth would remain below 7 percent in the first quarter of 2017, at 6.9 percent. India’s GDP for the fiscal year to March 2017 is expected to grow 6.9 percent, according to the poll of over 20 economists. That is higher than the International Monetary Fund’s estimate of 6.6 percent. “If the demonetization exercise has led to some permanent supply-side disruptions, growth could be weaker for longer,” wrote Pranjul Bhandari, chief economist for India at HSBC, in a note.

 

According to Nomura, the factors responsible for a V-shaped recovery in the second half of this year include release of pent-up demand, minimal wealth destruction post demonetisation and fiscal gains for the government that are likely to accrue in 2017-18. “We expect a sharp rebound due to the release of pent-up demand post-remonetisation, stronger consumption due to large fiscal gains for the government (around 1 per cent of GDP), wealth distribution towards poorer households, and sharply lower lending rates,” the report noted.

It added that while much of the effect of the cash ban will be transitory, others will be longer lasting — formalisation of the economy, less corruption, boost to government tax revenues and higher financial savings. “Over time, we expect these benefits to outpace the short-term growth disruptions,” it added. Meanwhile, the International Monetary Fund has revised India’s GDP growth forecast on note ban woes by one percentage point to 6.6 per cent for the current fiscal.

Industrial and services output have been hobbled, with a survey earlier this month showing private sector activity contracted in December. “Lower growth for at least two quarters means that the output gap will take longer to close, suggesting that the revival of the investment cycle, which is already very weak, could be pushed out even further,” added Bhandari. Still, a majority of economists answering a separate question said they were confident or somewhat confident the government’s demonetization drive would boost consumption and investment in the longer-term.

Inflation hit a two-year low in December, with consumer prices rising 3.41 percent, well below the RBI’s near-term target of 5 percent by March 2017. It is expected to hover between 4.1 and 5.2 percent from now to mid-2018, giving the RBI room to make further rate cuts. But analysts expect the central bank to make only one rate cut over the poll horizon, tipping a 25 basis point cut at its upcoming Feb. 8 meeting, a week after the government presents the federal budget for the 2017/18 financial year.

(With inputs from Agencies)

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