Nomura Predicts A V-Shaped Recovery After Demonetisation Hit
Growth is seen rebounding to 7.4 percent in the fiscal year 2017-18.
A sharp dip in growth followed by an equally sharp rebound - that’s Nomura Research’s prediction for the path that the Indian economy will follow post demonetisation.
In a report released on Wednesday, the research house reiterated that it expects growth to take a significant hit over the next two quarters. Early indicators coming in post demonetisation suggest that the services and consumption sector have been worst impacted by the cash crunch. Since these were the two pillars of growth for the Indian economy, a slowdown here will mean a significant drop in GDP growth, said the research house.
Economic data released for November and December suggest that the strongest pillars of pre-demonetisation growth – consumption and services – have been the worst hit because of their higher cash intensity. Rural consumption, service sectors comprised of trade, real estate and hotels & restaurants, construction and transport have been particularly hard hit.Nomura Global Markets Research
The report goes on to add that the Nomura Composite Leading Index, which leads non-agricultural GDP growth by two quarters, points to a sharp slowdown in non-agriculture growth in the next two quarters.
Nomura expects growth in the fourth quarter of the current fiscal to slip to 6 percent while the first quarter of next fiscal may see growth fall further to 5.7 percent.
But that’s half the story. From there on, Nomura sees growth rebounding to 6.8 percent in the second quarter of the new fiscal. Once economic activity picks up as cash conditions normalise, growth may rebound to 7.4 percent in fiscal 2017-18 from the expected 6.5 percent in fiscal 2017.
We expect a sharp rebound due to the release of pent-up demand post-remonetisation, stronger consumption due to large fiscal gains for the government (~1 percent of GDP), wealth redistribution towards poorer households, and sharply lower lending rates.Nomura Global Markets Research
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The normalisation of economic activity is contingent upon the remonetisation process. While a recent update on the amount of new currency printed is not available, Nomura said that the currency-in-circulation data shows that the cash-to-GDP ratio continued to fall and stood at 5.9 percent of GDP, from 12 percent pre-demonetisation.
The report, however, went on to add that currency-in-circulation may settle at a lower level post demonetisation without hurting economic activity.
In our view, the economy no longer requires a cash-to-GDP ratio of 12 percent since some part of the cash was hoarded and because of a larger digital footprint. We believe that a ratio of about 9 percent (currency in circulation at Rs 13.5 lakh crore versus Rs 8.9 lakh crore currently) would be sufficient to stabilise activity. At the current printing run rate, we estimate that remonetisation will reach levels sufficient to stabilise activity by end-MarchNomura Global Markets Research
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Earlier this week, ratings agency Moody’s and its Indian affiliate ICRA said they expect the Indian economy to outpace peers despite the demonetisation hurdle.
In the short term, however, most agencies see a hit to growth. The International Monetary Fund in its latest World Economic Forecast cut the growth forecast for the current fiscal by 1 percentage point to 6.6 percent.
In a separate report, also released on Wednesday, Bank of America-Merrill Lynch (BofA-ML) said that incoming data show that demonetisation is hurting growth. While November industrial growth jumped to 5.6 percent on base effects, BoA-ML’s lead indicator is pointing lower, it said in the report.
The CSO (Central Statistical Organisation), in fact, has cut its FY17 growth forecast to 7.1 percent from 7.6 percent even without demonetization. Our Old series GDP growth is running at 4-4.5 percent - well below the 7 percent potential. Our demonetization survey shows that 60 percent of 2,000 respondents cut consumption. 44 percent of them have normalized.Bank of America-Merrill Lynch Report