HSBC Says, as Demonetization Effect Ebbs, India Set To Be Asia’s Standout Economy

According to a new report from HSBC, as the growth outlook for the broader Asian region looks challenging due to subdued trade, tighter financial conditions and weak capital expenditure, India is expected to be one of region’s standout performers this year.

Shrugging off any lasting effects from its program to remove 500 and 1,000 rupee bank notes from the financial system in November, labelled demonetization, HSBC, in a comprehensive report on Asia’s outlook for the year, noted India could grow at an annual rate of 7.1 percent for fiscal 2018 and 7.6 percent for fiscal 2019.

While China and the Philippines are expected to grow at 6.5 percent throughout the year and Indonesia at 5.1 percent, the prediction is higher than Asia’s average 2017 growth forecast at 4.9 percent.

Due to the short-term impacts of India’s cash crunch, the growth has been revised down from HSBC’s previous prediction of 7.5 percent and for the current fiscal year that ends March 2017, it is expected at 6.3 percent.

While many of its peers use the calendar year to report annual data, India’s fiscal 2018 will run from April 2017 to March 2018.

Despite India’s decision to wipe out 86 percent of the total value of currency in its cash-intensive economy late last year, the bank predicts a positive outlook on South Asia’s largest economy. Investors were confident about India due to a much stronger macro environment, HSBC’s chief India economist, Pranjul Bhandari, noted in the report.

“Inflation is in single digits, the twin deficits are under control and foreign exchange reserves are at comfortable levels,” she said.

Further long-term gains could result from the key reforms, and follow-up actions to them, which are also on the cards for India in the calendar year 2017. Economists expect Narendra Modi’s government to go after other avenues of black money including real estate, gold and foreign currencies following the demonetization program, which was aimed at going after so-called black money or undeclared income.

Even though some market watchers reckon its eventual roll out could be delayed further, the country is also set to implement reforms to replace its byzantine tax structure as early as April.

“India is likely to witness two big ‘reforms’ over the year – the play-out of the demonetization drive and the implementation of the Goods and Services Tax (GST) bill,” said Bhandari. “The hope is that both of these are followed up by necessary actions, which are critical to reaping long-term gains.”

Meanwhile, like the disruption caused during the roll-out of the demonetization program, Bhandari expects the early days of the GST implementation to be similarly disruptive.

Influenced by expectations for sluggish export demand, tightening financial conditions and weak capital expenditure, HSBC’s outlook for broader Asia – including Australia and New Zealand – is grim.

“It appears unlikely that exports will make a sustained recovery this year, or take over as a growth driver at a time when domestic demand continues to slow,” said Frederic Neumann, co-head of Asian economic research at HSBC, in the report. While the demand for Asian exports in the West remained subdued, he pointed out declines in domestic demand resulted in intra-Asia trade beginning to sputter.

Elsewhere in China, supported by recent economic data, the world’s second largest economy has demonstrated signs of stabilization. A series of property market cooling measures in a bid to address concerns of a real estate bubble were announced by the local government in the country last year.

(Adapted from CNBC)

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