Goldman and Deutsche Bank say as Cash Crunch Impact Ebbs, India’s Economy to Rebound Next Year

Even as a massive cash crunch is expected to drag growth lower in the current year, India will rejoin the ranks of the fastest growing major economies in the world next fiscal year.

While Goldman Sachs pegged the growth rate for financial year 2017-18 at 8.6 percent, according to Deutsche Bank India’s economy is forecast to grow 7.5 percent in the financial year through March 2018.

Led by a sharp drop in consumption as a result of the government’s attempts to crack down on undeclared income and counterfeit notes, experts predict a sizable dent to growth in the final two quarters of fiscal 2017 in the short-term. in the current fiscal year, Deutsche Bank expects India’s overall growth to slow to 6.5 percent on-year.

In comparison, Philippines, another major Asian economy, is expected to grow 6.8 percent in 2016 by Deutsche Bank. But since the Philippines uses a calendar year to report economic data, while India calculates its fiscal year from April to March, an exact comparison between the two countries, however, is somewhat complicated.

Bringing daily life to a halt in a country that is heavily reliant on cash, India demonetized 86 percent of total value of currency in circulation.

Eaerly next year, some relief is expected by Prime Minister Narendra Modi. with the Nikkei/Markit Services Purchasing Managers’ Index sinking to 46.7 from 54.5 in October, on Monday, Reuters reported activity in India’s services sector contracted last month.

“We see this as a one-off. There won’t be a major permanent loss of activity or wealth (and it will) rebound by the time the dust settles in March, April of next year,” Taimur Baig, chief Asia economist at Deutsche Bank told the media.

Baig said that higher wages for public servants due to a wage bill passed in June 2016, increased public spending and growing agricultural demand due to a better-than-expected monsoon season in fiscal 2017 would support the recovery.

Private consumption is expected to grow by 8.1 percent on-year in the 2018 fiscal year, Deutsche Bank’s forecasts show. Private consumption is predicted to grow only 5.9 percent on-year in fiscal 2017.

Private sector investments to remain subdued.

As companies and public sector banks have struggled with bad debts and non-performing assets, capital expenditure in India’s private sector has been lackluster.

“The bad debt problem in the corporate sector is still substantial,” said Baig. He added that banks have to recapitalize themselves and clean up their balance sheets before they become a far more “enthusiastic participant in domestic fixed asset formation,” a scenario not likely to play out over the next four-to-six quarters.

To raise resources, Indian companies have historically relied on bank loans. Experts believe companies could turn to the bond market for capital raising with the availability of loans scarce in the next several quarters.

“We’ve seen a very sharp decline in bond yields so non-bank financing might be the first area where we see some encouraging developments,” said Baig.

A lower yield suggests a higher demand for bonds among investors since bond prices move inversely to yields.

(Adapted from Bloomberg)

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Categories: Economy & Finance

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