India Could Lose Growth Crown Thanks To Demonetization

When India reveals its growth figures for the October-December quarter, it could lose its title as the world’s fastest expanding major economy.

While economists reckon that could be temporary, the release follows a demonetization-led cash crunch that hit India’s cash-heavy economy.

Well below the July-September quarter’s 7.3 percent pace, economists in a Reuters poll expected that India’s quarterly gross domestic product (GDP) grew at 6.4 percent annually. India will also fall behind China, which grew 6.8 per cent on-year in the October-December quarter, if the forecast is realized.

“This data will be crucial as it captures the impact of the banknote ban introduced in early-November,” according to economists at Singapore’s DBS Bank. The cash shortage affected sectors including automobiles, transportation, logistics, services and construction and likely disrupted logistics, production and supply of goods and services, they believe.

In order to help replace the old notes that were banned in November, the Reserve Bank of India (RBI) injected 9.2 trillion rupees ($135.21 billion) worth of new currency notes into the banking system, Reuters reported in January.

From an prior forecast of early February, Goldman Sachs revised their timeline for the effects of the cash crunch to ebb on the economy to mid-January as the bank was the of the opinion that the RBI’s pace of re-monetization was quicker than what the investment bank had expected.

According to analysts at Morgan Stanley, the effects of demonetization were waning and the notion that consumption has begun to normalize, as supported by data.

“We expect the impact on economic activity to normalize in the next one to two months,” the analysts said, adding that consumption will likely resume its recovery path from the June quarter.

As evidence of normalization in the Indian economy, the narrowing pace of decline in sales of motorcycles, seen as a proxy for rural demand, and improved car sales in January, a key indicator for urban discretionary spending, were pointed out by analysts at the Morgan Stanley.

Robust passenger vehicle sales growth in January was reported by market leader Maruti Suzuki along with Hyundai, Tata Motors, Toyota and Nissan, local media reports said. Maruti Suzuki saw its domestic sales rise 25.9 percent on-year according to the Times of India.

Up from a December print of 46.8, India’s services PMI for January reached 48.7 which is a broader indicator.

The manufacturing PMI in January was at 50.4 from 49.6 in December. PMI figures above 50 indicate an expansion in activities. However as companies and banks continue to struggle with bad debts and non-performing assets, private capital spending remains a concern for India.

“Private capex (capital expenditure) will remain somewhat weak given the trailing excess capacity and balance sheet issues in (public sector) banks and industrial sector,” said the Morgan Stanley analysts. Private corporate capital expenditure will recover only as of 2018, they predicted.

Replaced by new 500 and 2,000 rupee denomination notes, India unexpectedly announced all 500 and 1,000 rupee banknotes would be withdrawn from circulation last November.

Significant short term pain in cash-heavy sectors such as real estate, construction, gold, gems and jewelry would be the result of that step as predicted by market commentators and the move caught most people off-guard and led to a massive shortage of cash.

(Adapted by CNBC)

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Categories: Economy & Finance

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