Daily Management Review

India retains fastest-growing major economy tag despite cash crackdown


03/01/2017




India retains fastest-growing major economy tag despite cash crackdown
Despite the pain caused by Prime Minister Narendra Modi's shock cash crackdown, India's economy defied expectations on Tuesday to retain the title of the world's fastest-growing major economy.
 
From 7.4 percent the previous quarter, Gross domestic product (GDP) growth slowed to an annual 7.0 percent in October-December. A 6.4 percent growth rate had been expected by analysts polled by Reuters. For the last three months of 2016, India's growth was higher than China's 6.8.
 
The federal statistics office retained its growth forecast for the fiscal year ending in March 2017 at 7.1 percent.
 
Modi's decision last November to outlaw old 500 rupee and 1,000 rupee banknotes, taking out 86 percent of the currency in circulation virtually overnight had been expected to hit the economy hard by many economists and the figures surprised economists who had expected a bigger hit to teh economy.
 
"Perhaps this data is not capturing the impact of demonetisation," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance Co.
 
"I am totally surprised and stunned to see this number ... I believe that, with a lag, we will see an impact on GDP numbers."
 
The central bank had all along maintained that economic disruption caused by Modi's shock monetary therapy as a transitory phenomenon and the data also backs the central bank's assessment.
 
However there were nay-takers for the data as well.
 
It is too early to celebrate, said country's former finance minister, P. Chidambaram.
 
"The GDP numbers have come as a bit of a surprise," Chidambaram said in a TV interview on Wednesday. He added that including estimates made by the IMF, the Reserve Bank of India (RBI) and the Center for Monitoring Indian Economy, the 7 percent projection by India's Central Statistics Office is completely out of line with other projections he had seen.
 
He said, "All these are very credible institutions which have made credible forecast in the past, so I think we'll have to take this number for what it is for the time being and examine it closely."
 
Schroders' emerging markets economist, Craig Botham said that the better-than-expected GDP print also meant that the demonetization policy likely failed to tackle India's black money problem, for which it was introduced. "For consumption to soldier on unaffected suggests that there has been little wealth shock."
 
But since some of it does not add up with high frequency real activity data that provide more accurate snapshots of the economy, there are expectations among other economists that India could end up revising its numbers lower for the December quarter. Suggesting cash-intensive consumption and services were hit, there were notable decline in the monthly data on auto sales, purchasing managers' indexes, cement production and capital goods production in November and December.
 
"The implications from the official GDP statistics that demand in the cash-intensive sectors (private consumption, transportation) picked up after demonetization appears to be at odds with the reality," according to Sonal Varma, chief India economist at Nomura.
 
In the last quarter, shown in official data compiled by Nomura in a note, the standout figure in the GDP read was the 10.1 percent jump in private consumption.
 
Consumption demand was supported by a combination of festival demand, wage hikes for public sector employees and good monsoon rains crucial for farmers, said Citigroup economists Samiran Chakraborty and Anurag Jha. "But the sharp decline in our rural demand indicator indicate that this data point could be prone to revision in subsequent releases," they said.
 
(Source:www.cnbc.com) 






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