Morgan Stanley Sees Marginal Hit To Fiscal 2017 Growth From Demonetisation

carries a bag towards his motorcycle in Bengaluru, India (Photographer: Dhiraj Singh/Bloomberg)

The government's decision to withdraw Rs 500 and Rs 1000 notes, which has left the economy facing a cash crunch, could bring down growth this fiscal albeit by a small margin, said Morgan Stanley in its 2017 India Economic Outlook report. The financial services firm, however, expects growth to normalize next year.

Morgan Stanley expects GDP growth for fiscal 2017 at 7.3 percent from an earlier forecast 7.7 percent. For fiscal 2018, Morgan Stanley expects growth at 7.7 percent compared to 7.8 percent earlier. Additionally, Morgan Stanley expects India to grow at a rate of 7.9 percent in fiscal 2019, the report showed.

Normalisation of Economic Activity

The cash crunch will disrupt economic activities in the country to an extent, given that India is primarily a cash heavy economy.

Nearly 70 percent of the value of consumer payments and 98 percent of the volume of consumer payments is in cash.

Morgan Stanley : 2017 India Economic Outlook

However,the situation is expected to normalise by the end of December. According to Morgan's estimates, by this time, 98 percent of the currency supply needed for transactions would be replenished.

For the next three to six months, consumption will remain subdued as households hold back spending on big-ticket items in the near term, said Morgan Stanley while adding that property spending may be impacted in the medium term. The report noted that the demonetisation should not have an impact on consumption in the longer term.

Outlook For Capex

The ban on Rs 500 and Rs 1,000 notes came at a time when private capital expenditure, though improving, had not completely taken hold. Demonetisation and its economic consequences may mean that it will take longer to bridge the gap between private and public capital expenditure. Morgan Stanley expects private capex to continue lagging until 2018.

We think private capex is likely to stabilise at low levels in 2017, and expect a more full-fledged recovery in 2018. 2018 will be the first year of recovery in private capex after six years of a weak trend.

Morgan Stanley : 2017 India Economic Outlook

Productivity-Enhancing Reforms

The Government of India is likely to maintain fiscal discipline and continue its focus on "productivity-enhancing reform". Additionally, the effort to bring private capital expenditure up to the level of public enterprises will also go on, said the report.

Though many reforms, such as unique identification, social benefits, new monetary policy regime and implementation of goods and service tax, have already been implemented or are close to implementation, other productivity-enhancing reforms such as land and labour reforms are still in the pipeline.

The Global Backdrop

Morgan Stanley expects global GDP growth to increase to 3.4 percent in 2017 from 3 percent in 2016. This should be positive for Indian exports, said Morgan Stanley. A larger share of India's exports (59 percent) go to emerging markets, which are likely to drive global growth in 2017.

Morgan Stanley also noted that India is better equipped now than in 2013 to face an event such as increase in interest rates from the U.S. Federal Reserve. The Fed is widely expected to raise rates in December 2016.

To maintain financial stability, India will have to keep one eye on inflation while also keeping a watch on its trade deficit, the report said.