India growth hit but bounce back likely in 2018: Nomura Holdings

MUMBAI: India’s growth will be lower than earlier anticipated because of the adverse impact of demonetisation, however, the economy will bounce back in 2018 mainly as the government will have more money to spend due to a wider tax base and higher taxes, Japanese investment bank Nomura Holdings said on Wednesday.

Nomura has cut its 2016 growth estimate for India to 7.1 per cent from 7.8 per cent before the November 8 announcement by the government. Growth estimate for 2017 has also been reduced to 7.1 per cent from 7.6 per cent earlier expected. However, it predicts a bounce back to 7.7 per cent growth in 2018.

“Despite the short term disruptions we are quite positive because we believe that the foundations for a sustainable pickup are being laid,” Sonal Varma, chief India economist at Nomura said. The investment bank predicts a 1 per cent to 1.25 per cent hit to India’s GDP growth in the quarter ended December 2016.

Nomura believes that the government will collect Rs 70,000 crore from the income tax declarations scheme announced in November which at 0.5 per cent of GDP will be higher than the Rs 30,300 crore collected from the scheme that closed in September and Rs 10,100 crore earned in the voluntary disclosure scheme in 1997.

These funds will boost government spending without straining fiscal deficit. Also the huge amount of deposits banks have received because people have deposited their high value currency will cool off interest rates and could boost lending further helping growth Nomura said.

“The benefits of the government move will start to show in the second half of 2017. We expect the demonetisation impact to be transitory not long lasting. Cash shortage will hurt transactions in cash sensitive sectors but we expect medium term benefits as there is wealth redistribution,” Nomura said referring to the surge in deposits in Jan Dhan accounts after the demonetisation.

The Japanese investment bank expects the rupee to weaken to 70.2 per dollar from 68.7 per dollar in 2016 but it will still do better than other emerging market currencies. “Headwinds from strong US growth, a strong dollar and high US yields will also impact rupee.

However, the rupee will lose just about 3 per cent, which is lower than the 5 per cent to 6 per cent loss we expect in other emerging market currencies like the Chinese yuan or the Korean won. We view India as a positive for both fixed income and equity markets,” said Neeraj Gambhir, head of fixed income at Nomura.