According to Schroders' Emerging Markets
Economist, Craig Botham, although it is good news that India's
latest GDP data has surpassed expectations, it might imply that
the demonetisation policy has been a
failure.
"Indian GDP surprised to the upside for the final
quarter of 2016, growing 7% y/y , slower than 7.4% in the
previous quarter but better than a market consensus of 6.1%, and
our own expectation for 6.5% growth. We had warned that consensus
was likely overestimating the impact of demonetisation on the
economy, but it would appear even then we were still too
negative.
A breakdown of the expenditure data shows private
consumption accelerating despite the withdrawal of over 85% of
notes from circulation. In fact, the only negative impacts came
from net trade, with imports climbing more than exports, and
valuables. Investment, consumption and government spending all
rose.
In one sense, this is good news for the Indian
economy. Extremely negative expectations have been confounded and
growth has faced only the mildest of interruptions. However, it
does imply that the demonetisation policy likely failed in its
aim to tackle black money. For consumption to soldier on
unaffected suggests that there has been little wealth shock, and
indeed central bank data shows that 97% or more of the old notes
were returned.
This also suggests the central bank was right to
end its easing cycle: activity needs less of a prop than had been
imagined by the market, and inflation could prove more robust as
a result. With elections ahead, this is also a boost for Prime
Minister Modi’s government, and to us would seem to raise the
odds of successful passage of the Goods and Services Tax this
year."
