Demonetarisation dragging on growth in India

NEW DELHI - According to the first advance estimates released by the Government, India’s GDP growth slowed to 7.1% y/y in FY2017, but despite demonetisation, the moderation in consumption was less than expected due to strong Government consumption. Nonetheless, ANZ Bank believes consumption growth is likely to be revised downwards in the next update.

“To be sure, consumers were likely to have postponed purchases as highlighted by the contraction in auto sales and commercial vehicles,” says ANZ in a research note.
“On the activity side, agriculture growth likely printed a robust 4.1% y/y, in the wake of normal monsoons.
“Manufacturing growth eased to 7.4% y/y as the banknote ban impacted production in labour-intensive and less organised sectors.
“The rise in input cost, weak pricing power due to ongoing tepid demand conditions, and inventory build-up post-demonetisation weighed on the sector.
“Meanwhile, growth in the services sector remained steady as a decline in the cash-intensive ‘trade hotel etc.’ sector was offset by strong momentum in Government-related services and healthy growth in financial services due to a surge in bank deposits.
“The pace of revival of economic activity will depend on the remonetisation and the adoption of digital transactions.
The Reserve Bank of India has issued about INR6trn worth of fresh notes, equivalent to 40% of ceased legal tender. At this pace, we expect currency in circulation to normalise by the end of January 2017.”
Despite the short term disruptions, growth will likely revert to 8% in FY2018 as the economy is expected to shift towards organised sectors due to demonetisation and the adoption of goods and services tax (GST), ANZ says.
“We continue to expect the RBI to deliver a 25bp cut at its meeting in February. Subsequently, we expect the RBI to remain on a prolonged pause, as the persistence in core inflation and recovery in global crude prices will limit policy space.” www.live.anz.com (ATI).