According to global financial services major HSBC, the economic growth in October-December, the first following the demonetisation, surprised on the upside but the details are "sobering".
The economic impact of demonetisation has been “sizeable but not catastrophic” and the country’s growth momentum is expected to be U-shaped going forward, experts believe. According to global financial services major HSBC, the economic growth in October-December, the first following the demonetisation, surprised on the upside but the details are “sobering”. HSBC India Chief Economist Pranjul Bhandari believes three main reasons explain the strong third quarter numbers. First, given cancelled notes were still in use during the quarter, cash crunch was not as severe as initially expected. Second, the statistics office may have overestimated the growth print given it is not able to collect quarterly informal sector data which is likely to have been hurt most by demonetisation.
And third, stripping off agriculture and government spending from overall growth reflects true impact of demonetisation more closely, she said in a research note. “We do not see the basis for a v-shaped recovery; rather we expect it to be more U-shaped,” Bhandari said. According to a Capital Economics report, the withdrawal of high value notes in November had created huge economic uncertainty and some initial data looked alarming like vehicle sales and the PMI readings which dropped sharply. “But more recently, these and many other indicators suggest that activity has already partially rebounded,” it said adding, “it appears that the economic impact of demonetisation has been sizeable but not catastrophic”.
According to the report, demonetisation has caused growth in India to slow down but the economy is set to recover as consumption and investment rebound. “We expect demand to continue recovering as newly-issued cash becomes more widely available,” Capital Economics said in a research note adding that in all, we are forecasting growth of 6.3 per cent in 2017 and 6.5 per cent of 2018, compared with our estimate of 5.7 per cent in 2016.
The onus for lifting growth more substantially therefore lies with the government and its ability to push ahead with structural reform. “As things stand, we see growth accelerating to around 7 per cent over the medium term, from around 5~6 per cent in the recent past. However, this would still be slower than the growth India could achieve with more aggressive reforms,” the report added.