Talking Point: Note ban, short term pain for growth

Estimating growth to largely remain unchanged for the next 12 months, the Japanese financial services major said the GDP would stand at 7.1 per cent in 2016 as well as 2017 and would pick up to 7.7 per cent in 2018. The GDP stood at 7.2 per cent in 2015. “Bottom line for India in our view is that there will be shortterm growth disruptions (due to currency replacement scheme). But, we think a foundation for more sustainable growth pick up is now being laid,” Nomura India Chief Economist Sonal Varma said. “So, we are quite positive on the medium-term outlook,” she added. 

Nomura feels three factors, including demonetisation, will contribute to slowdown in growth.  “We see cash crunch to last till the end of January. So, some of the disruption is going to spillover to the next quarter as well,” Varma said, adding GDP growth will dip by over 100 bps to 6 per cent for in the December quarter before rising to 6.9 per cent in the March quarter. 

Noting that demonetisation will give a liquidity boost, she noted that the exercise can serve as tailwind as lending rates are expected to decline. Besides, with all the money coming back into the system there is huge velocity and will be used for productive purpose but this will take some time to play out, Varma said. 

“Our expectation is that benefits will start to show in the second half of 2017.” Among other factors that could disrupt the economic growth, according to Nomura, is the implementation of the goods and services tax (GST). “Our baseline is that GST will be implemented next year. Some of the countries implementing GST actually did see some growth disruption.” 

Observing that post-GST manufacturing products are expected to come down while services likely to become more expensive, Varma said demand for certain high-end durable consumer goods could be postponed till after the implementation of the new tax regime. 

“There are some short-term risks in the run-up to GST roll-out as some demand will be postponed to that for after implementation of GST.” Any rise in global commodity prices could also harm the growth trajectory.