Employees use press punches to cut lock components (Photographer: Udit Kulshrestha/Bloomberg)

Brokerages Expect Growth To Pick Up After Recovery From Demonetisation Kicks In

India's economic growth slowed in the first quarter of fiscal 2017-18 as a sharp decline in the manufacturing ahead of the Goods and Services Tax rollout pulled back the macroeconomic indicator.

Brokerages, however, expect a recovery in the coming quarters.

Morgan Stanley
‘Demonetisation, GST In Rear View Mirror’

The Indian economy has been impacted by the “idosyncratic factors” of demonetisation and the GST implementation, but those concerns are “in the rear view mirror”, said Morgan Stanley, in a research note. It expects further acceleration in growth subject to downside risks to its forecast.

Underlying demand, though, has remained strong as seen in the “robust growth” of discretionary spending, the brokerage pointed out.

Hence, as the impact of these factors wears off, underlying economic growth should recover.
Morgan Stanley Research

The key risks to economic growth, according to Morgan Stanley, include the impact of a weaker monsoon on agricultural output and the pace of bad loan resolution which would impact credit growth and, in turn, private capital expenditure.

How Soon Will The Economy Recover From GST?

Japanese brokerage Nomura said that the slowdown in GDP as seen in flat GVA growth reflects a “sharp rise in subsidies” during the quarter. Cash-intensive sectors saw a rebound due to remonetisation, but that was offset by a slowdown in agriculture and manufacturing, it said in a report.

Even as headline GDP data have disappointed, the turnaround in private services suggests that the growth cycle will head higher once the GST effects fade.
Nomura Global Markets Research

The real question, Nomura stated, is how soon will the economy recover from the disruption caused by the new tax regime.

Nomura revised its full year forecast for GDP growth to 6.7 percent from 6.9 percent earlier, adding that it expects an acceleratation to 7.8 percent in 2018.

IDFC Securities
‘Disappoint significantly’

These growth figures would not prompt RBI for a rate reduction in its October policy as it has already cut rates by 25 basis points in its August policy.

  • Consumption is expected to boost growth in the rest of FY18
  • Pay commission, agriculture produce and wealth effects to boost income
  • Trimmed GVA forcast to 6.5 percent from 7.1 percent for FY18
  • RBI task more complicated due to higher inflation prints from now on.
Axis Capital
‘Soft growth during ‘transition phase’ could be tolerated’
  • Normal monsoons and fall in cost of capital to boost re-stocking
  • steep drop in realisation for farmers and weak employment outlook sullying urban consumer sentiment is a risk
  • Not small-ticket discretionary spending but large ticket consumption like real estate may weaken
  • Import substituion's effect on domestic manufacturing and tpurismcould appreciate the rupee therby negatively affecting GVA
  • Axis capital sees clear downside risks to their 7.2% GVA forecast for FY18.
  • RBI will cut policy rates by 25 basis points this year to ensure that real policy rates are at neutral level
‘Recovery from demonetisation tepid; GST impact muted so far’
  • Growth numbers not expected to improve because recovery from demonetisation progresses and favourable base effect kicks in H2FY18,
  • FY18 GVA growth forecast cut to 6.8 percent from 7.1 percent with downside risks.
  • A sharp acceleration in growth to 7.2 percent in the next 9 months premised on recovery from demonetisation and low base effect
  • There are downside risks to their GVA forecast if government spending slows amid fiscal challenges