A new report suggests the Indian economy has weathered remarkably well the adverse impact of the unexpected and unprecedented demonetization scheme announced late last year.
Under the scheme the Indian Government ordered the withdrawal of all Indian rupee 500 and 1,000 notes, representing more than 86% of the money supply.
This was a significant move in a country where most transactions are still carried out in cash.
Despite the decision real Gross Value Added GVA growth rose 6.6% in quarter three (Q3) of 2016-17, while real GDP growth moderated to 7% in the same quarter.
This was the slowest pace in seven quarters, from 7.4% in the previous quarter. Yet, this came far above market expectations (consensus: 6.1%).
However, caution is required when reading this puzzlingly good GDP/GVA report for 2016-17, warns Coface, a global leader in credit insurance and risk management.
“These figures will probably be revised downwards when more data becomes available,” it has advised clients in a recent briefing.
According to Bloomberg, TCA Anant, the Indian Government’s chief statistician said: "We have only advance filings by corporates”, while “full corporate filing data will not be available until the close of the financial year”, and “full data will be available only by January next year".
Coface warns of several potential risks facing exporters and investors.
“On the ground reality would probably be worse than what the GDP/GVA report suggests,” warns Coface.
According to the Economic Times bad loans were estimated at 12.5% of the total lending at the end of 2016.
And according to Bloomberg that compiled the government’s data: “Stressed assets – made up of bad loans, restructured debt and advances to companies that cannot meet servicing requirements – rose to about 16.6% of total loans.”
This would probably limit the lending potential of banks.
And because of the possible deterioration in banks’ lending books, the reduction in corporates’ overall borrowing costs, would probably be postponed.
Also, the RBI announced to shift its monetary policy stance to “neutral” from “accommodative” in early February, reducing the possibility of further monetary easing.
Meanwhile, foreign and domestic corporates would probably focus more on restoring their business operations to pre-demonetization level and preparing for the next reform (ie GST to be implemented probably by mid to late this year). All this would add downside risks to the investment recovery in the coming months.
But on a positive note, Coface says the expansionary fiscal policy as indicated by the recently announced Budget for 2017-18 would probably help boost the economy.
Budget measures include tax cuts for corporates, relief for farmers and more infrastructure spending – and the disruption from the demonetization would be temporary.
As a result, India’s economy is expected to rebound to grow above 7% in 2017-18, Coface predicts.