Poised for a resurgence?

The government’s demonetisation measures have caused growth in India to slow but the economy is set to recover as consumption and investment rebound. Longer-term prospects have also been boosted as Prime Minister Modi’s reform agenda has gained momentum. But the ruling BJP’s lack of power in the upper house of parliament along with its apparent lack of appetite for politically-contentious reforms means that India will not return to the growth rates of a few years ago. The government’s withdrawal of the legal status of INR500 and INR1,000 notes in November has created huge economic uncertainty. Some initial data looked alarming. For example, vehicle sales and the PMI readings dropped sharply. But more recently, these and many other indicators suggest that activity has already partially rebounded. It appears that the economic impact of demonetisation has been sizeable but not catastrophic. As things stand, we see growth accelerating to around 7% over the medium term, from around 5~6% in the recent past. However, this would still be slower than the growth India could achieve with more aggressive reforms.