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.
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.
