The sudden move to ban the circulation of more than 80% of India's currency last November took the market by surprise, leading to extensive speculation that "demonitisation" would stop India's economic recovery sharply in its tracks and cripple long-awaited reform processes.
There's plenty to be encouraged by as Indian growth revives, reforms get serious and consumption expands.
In what came as a shock announcement, Prime Minister Narendra Modi declared all 500 and 1000 Indian Rupee notes would be taken out of circulation, leading to cries that consumption patterns and economic growth would be curtailed.
But in recent months, there has been an equally surprising revelation: the impact of demonitisation has not been as bad as originally feared.
Returning from a recent trip to meet with key decision-makers and clients, BNP Paribas' Emerging Markets Equity Strategist Manishi Raychaudhuri says there is clear, positive economic momentum with reviving growth, low current and fiscal deficits, supported by low inflation, benign commodity prices and a rapid recovery from the effects of demonitisation.
How has your observation of the Indian economy changed over the last few months?Answer: What we really observed in late March is that the government was clearly getting increasingly serious about sorting out the banks' non-performing assets (NPA) problem, and that's a key change from our understanding during previous trips.
Resolving the problems arising from the non-performing assets (NPA) of banks remains an ongoing struggle for Indian policymakers. Based on the latest feedback from government departments, we sense the gradual understanding that the bad loan problem will need a political solution as well as a clear government commitment to stand behind the assets
It's equally the case that some of the legacy problems linger - a lack of private capex, unexciting job creation and asset quality problems for banks - particularly public sector banks - to name a few.
Which factors do you see driving this forward momentum?Answer: There's incredibly strong political capital for the ruling party post Assembly Election outcomes and this increases the likelihood of continued reform momentum. The twin focal points of the government appear to be a smooth implementation of Goods and Services Tax (GST) and continuing to maintain fiscal balance through expansion of Direct Benefit Transfer (DBT) to many more central government schemes.
The recent approval of four bills related to GST imply it is on track for the intended 1 July 2017 roll-out. On the whole, goods manufacturers seem happy with the way GST is being envisaged and with the tax offsets they are likely to get. In addition service companies appear more wary about getting all the eligible tax offsets- particularly because of the need to register separately in all states and union territories.
Payment of subsidies by DBT is possibly the single biggest leakage-plugging mechanism instituted by the government. Since its inception in 2013, payment of subsidies by DBT has seen rapid expansion - initially in the payment of fuel (LPG) subsidies, and now increasingly towards payment of food and fertiliser subsidies. Currently, pilot programmes are in place for paying food, kerosene and fertiliser subsidies in central and south India. Fertiliser and food subsidies, when brought fully under the ambit of DBT payments, could plug some of the biggest leakages, and could account for some of the most significant fiscal cost savings, in our view.
We heard a lot about the impact that demonetisation was expected to have on consumption earlier in the year. What did you observe on the ground?Answer: Consumption recovery, post demonetisation, has largely been encouraging. Two of the strongest barometers of rural and urban consumption - two wheeler and passenger car sales - seem to have bounced back nicely in February and March. Some of the aggregate indicators - the Nikkei India Manufacturing Purchasing Manager's Index for instance - show the same trend of a sharp revival over the past couple of months.
One industry trend we've observed is the quickening of expansion in digital banking and digital payment channels. While these had already been in a period of rapid growth over the past four years, we see the pace of digital banking expansion has clearly accelerated since demonetisation, with the accelerated set-up of Point of Sale (POS) terminals and implementation of new mobile banking channels.