Economist Who Predicted Growth Slump Sees Lingering Pain From Notes Ban

Government data on Thursday showed consumption continued to fall under the impact of Prime Minister Narendra Modi's clampdown on cash and investment stayed sluggish.

Economist Who Predicted Growth Slump Sees Lingering Pain From Notes Ban

Notes ban impacted consumption in the country, leading to lower GDP growth, economists say.


  1. GDP growth hit 5.7% in April-June, slowest pace since 2014
  2. Figure to recover only slightly to 5.9% in July-September, says economist
  3. Effects of cash ban likely to be felt for a few quarters, he adds

The only economist who accurately predicted India's growth slump sees a bit more pain ahead.

Gross domestic product will recover only slightly to 5.9 percent in July to September from the previous quarter's 5.7 percent, which was the slowest pace since 2014, predicts Hugo Erken, a senior economist at Rabobank International. Government data on Thursday showed consumption continued to fall under the impact of Prime Minister Narendra Modi's clampdown on cash and investment stayed sluggish.

"The effects of the cash ban were likely to be felt for a few quarters," Erken said by phone from the Netherlands. "The high level of non-performing assets are contributing to subdued private investments."

The data will probably bruise PM Modi's administration, which is battling growing perceptions of the futility of its policy after a central bank report on Wednesday showed that demonetization didn't meet its targets. With private surveys indicating worsening business conditions following the July 1 roll out of a nationwide sales tax, the monetary authority may be pressured to keep interest rates lower for longer even as inflation accelerates.

Governor Urjit Patel cut the benchmark repurchase rate this month to 6 percent from 6.25 percent to help meet an "urgent need" to boost investment. Minutes of the meeting show he's now counting on commercial banks to lower borrowing costs as the Federal Reserve's tightening limits room for policy easing. India's inflation is also rebounding from a record low in June, further closing the window.

PM Modi's ability to stimulate the economy is limited because figures from the national auditor on Thursday showed the budget deficit touched 92 percent of the full-year target in the first four months of the year started April 1, compared with 74 percent for the same period last year. The outlook for consumption, long considered the main driver of the economy, is also bleak as a survey from Mastercard Inc. published this month shows that Indian consumers are no longer Asia's most optimistic.

Meanwhile loan growth languishes near a two-decade low as companies staggering under bad debt, with factories operating at less than 75 percent of capacity, await evidence of a pick up in demand before they buy machinery or hire more workers.

'Double Whammy'

Thursday's data come on the heels of a central bank report late Wednesday, which showed that Indians deposited nearly all the currency bills voided by PM Modi, dealing a blow to his drive to unearth unaccounted wealth.

PM Modi's government is "picking the pockets of consumers" to strengthen its coffers, said Salman Anees Soz, a spokesman of the opposition Congress party and former World Bank official.

The "GDP print, along with yesterday's underwhelming revelations about the impact of demonetization in wiping out black money, is a double whammy for the PM Modi government," said Milan Vaishnav, a senior fellow for South Asia at the Carnegie Endowment for International Peace. "This government's calling card was responsible economic stewardship, but its performance on this front is raising serious doubts."

Dharmakirti Joshi, chief economist at Crisil Ltd., the local unit of S&P Global Ratings, is downgrading his growth forecasts for India from 7 percent for the year through March 2018. However the trajectory will be upwards, he said.

Gross value added, a key input of GDP that the central bank closely tracks, came in at 5.6 percent April-June compared with the 6.2 percent estimate. Export growth slowed to 1.2 percent from more than 10 percent the previous quarter.

GST Impact

The disappointing numbers are because companies and retailers were paring inventories of goods to prepare for a change in prices under the new goods and services tax and GVA may revive in July to September, said TCA Anant, India's top statistician.

"So this is something which we may want to keep in mind," he told reporters at a briefing in New Delhi soon after the data was published. The Reserve Bank of India forecasts GVA will grow 7.3 percent this fiscal year. It doesn't provide a GDP projection.

Erken, who plays in an indie/rock/pop band called Overdwars when he isn't making economic predictions, sees GDP growing 6.9 percent in the current fiscal year. He began covering India for Rabobank at the start of 2017 after stints with the Dutch government.

"The reforms will weigh on India in the short term, but in the medium term, growth should rebound," Erken said.

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