Demonetization and GST to normalise

Japanese banking group Nomura is bullish on India and expects a strong 7.5% gross domestic product growth in 2018 disruption caused by demonetization and goods and services tax (GST) normalizes.

The risk, it says, is from higher oil prices as Indian imports 70% of its crude oil and the ongoing state elections, where voters play their cards to give a political message to the ruling parties.

“We remain bullish on India’s macroeconomic outlook,” said Nomura in its Asian economic outlook 2018 report.

“The economy is on the cusp of a cyclical recovery and the government has continued to implement structural reforms and prudent macro policies, the tangible benefits of which may be harder to pinpoint right now, but over time will be positive for growth, it pointed out.

Two major disruptions – the demonetisation exercise in late 2016 and the
GST introduction this year – will be positive positive for economic growth in the long term.

It pointed out that India’s Gross Domestic Product (GDP) growth bottomed-out in Q2 2017 at 5.7% y-o-y, rising to 6.3% in Q3. Nomura forecast
6.7% in Q4, for full-year growth of 6.2%, rising to 7.5% in 2018.

“Given base effects, we expect growth in H1 2018 (7.8%) to be higher than in H2 (7.1%).

“Further out, we expect growth of 7.3% in 2019 – a solid print, aided by manufacturing and private services on the supply side and investment and private consumption on the demand side.”

It has listed out growth factors. The normalisation of GST-related supply disruptions; the positive effects of bank recapitalisation; a positive remonetisation impulse; and a positive fiscal impulse.

Normalisation of supply disruptions GST-related supply chain disruptions have resulted in import substitution (higher imports, lower domestic production) across a number of sectors (including capital goods,
chemicals, textiles and rubber & plastic) and imposed a greater compliance burden and working capital constraints (delayed input tax credit) on small and medium enterprises (SMEs) and exporters.

“We expect this to change,” added Nomura.

To address these concerns, the GST council has raised the eligibility limit under the composition scheme, extended the dates for filing returns, disbursed pending refunds, allowed duty-free sourcing of materials for export until March 2018 and lowered GST rates.

“As a result, we expect SMEs to ramp up production, exporters to
benefit from the stronger global export upcycle, import substitution to reverse and growth to jumpstart. 2018 should be 2017 in reverse,” Nomura underlined.

The government’s comprehensive recapitalisation plan (recap) for public sector banks (PSBs) worth Rs2.11trn (1.3% of GDP) in FY18 (year ending March 2018) and FY19 should enable the process of balance-sheet deleveraging. The resolution of non-performing assets (NPAs) was slow as a lack of capital dissuaded PSBs from writing off bad loans.

But as these are now being written off, firms’ excess leverage should decline, setting the stage for a capex revival over time.

Additionally, Nomura estimate that Rs.700-750 billion of the recap package will be available as growth capital, which should enable banks to extend additional loans worth 7.3-8.3% of outstanding credit (assuming a leverage ratio of 8-9x). This should ensure sufficient funding for borrowers with no leverage (consumers), where reforms are ongoing (public
capex projects) and ensure it is not denied to those in need (SMEs).

The reflationary effects of remonetisation are yet to be seen. Nomura estimate that real M1 money supply growth will rebound from a contraction of 5.3% y-o-y for the 12-month period ending September 2017 to growth of 13.2% for the year ending September 2018.

Changes in real M1 growth lead changes in real non-agriculture GDP growth by around one to two quarters as it captures transaction demand for money.

Hence, the expected jump in real M1 money supply should boost non-agriculture GDP growth, especially in H1 2018.

“We expect cash-intensive sectors such as manufacturing, construction, real estate, trade, transport, hotels and communications to benefit most,” highlighted Nomura. fii-news.com