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Stablising Oil Prices, Not Note Ban, Behind India’s Growth Slowdown: JPMorgan

Near-term disruptions caused by demonetisatio must be traded off with medium-term benefits, says JPMorgan.

Refined fuel runs from a faucet in a test facility. (Photographer: Oliver Bunic/Bloomberg)
Refined fuel runs from a faucet in a test facility. (Photographer: Oliver Bunic/Bloomberg)

India’s growth slowdown was primarily on account of stabilisation in international oil prices rather than demonetisation, said Sajjid Chinoy, chief India economist at JPMorgan, in a conversation with BloombergQuint. A quarter before the note ban, India's gross domestic product growth slowed by 100 basis points, he said.

“In 2015-16, growth accelerated to 8 percent despite being a drought here because this was underpinned by the falling oil prices and the positive terms of trade shocks,” Chinoy said. Once oil prices started to stabilize, growth began to “roll off”. Some of India’s large companies started deleveraging at the same time, adding to the slowdown, he added.

That being said, demonetisation did lead to a near-term disruption for a few quarters. “One is, there was a transitory near-term growth hit for couple of quarters. So, absent demonetisation, GDP growth would have been lit bit higher,” he said. The move also shocked India’s supply chain sector, comprising of small to medium enterprises which in turn led to the tripling of imports and reduction in the purchase of domestic materials.

But these near-term disruptions need to be traded off with medium-term benefits.
Sajjid Chinoy, Chief India Economist, JPMorgan

Higher financial savings and increased bank deposits led to a inter-bank liquidity surplus right after demonetisation, which still hasn't receded completely. “That explains why you have seen asset under the management firm or mutual fund or life insurance subscription have picked up after demonetisation,” Chinoy said.

It also expanded the tax base of the country which is 27 percent higher than that last year, he added.

Watch the entire conversation here.