Mumbai: Even as the demonetisation drive is likely to cause short-term disruptions in the economy, the move is part of a foundation being laid out for more stable growth, Japanese brokerage Nomura has said.
Estimating growth to largely remain unchanged for the next 12 months, the Japanese financial services major said the GDP would stand at 7.1 percent in 2016 as well as 2017 and would pick up to 7.7 percent in 2018. The GDP stood at 7.2 percent in 2015.
"Bottom line for India in our view is that there will be short-term growth disruptions (due to currency replacement scheme). However, we think a foundation for more sustainable growth pick up is now being laid," Nomura India Chief Economist Sonal Varma told reporters here today.
"So, we are quite positive on the medium-term outlook," she added.
According to Nomura analysis, three factors, including demonetisation, will contribute to slow down 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 percent for in the December quarter before rising to 6.9 percent in the March quarter.
However, 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 with respect to 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."
She noted that any rise in global commodity prices could also harm the growth trajectory.
Varma maintained the expected pay hikes (due to 7th pay panel award) as well as accelerated foreign fund inflows are some of the growth triggers for Asia's third largest economy.