Data indicate that while demonetisation has triggered a slowdown, the full impact may be seen only in December

Japanese financial major Nomura said its ‘Composite Leading Index (CLI) for India for early 2017’ — tracking the non-agricultural GDP growth with a two-quarter lead — had slumped to the lowest level since the series started in 1996, due to demonetisation and the consequent cash crunch.

“Our CLI has slumped to the lowest level since the series started in Q2 1996 and is consistent with GDP growth of below 6 per cent — which poses downside risk to our Q1 GDP growth projection of 6.9 per cent,” Nomura said in a report on India.

The Japanese financial firm added that near-term growth may decelerate much more than expected. The firm said the time frame for the rebound would depend on how quickly policymakers remonetise the economy.

“Our expectation is that the cash crunch will ease out by February and hence growth should start to recover from Q2 2017 onwards, supported also by the ongoing redistribution of wealth and ample banking system liquidity,” it added.

Partially visible

Nomura’s economic heat-map of high-frequency data indicates that while demonetisation has triggered a slowdown, the effect is only partially visible in November data, with full growth impact likely to be seen only in figures for December.

Data thus far suggest that demonetisation has hit rural consumption demand harder than urban demand, services more than manufacturing, and exports more than imports, according to Nomura. “Industrial production growth will rebound in November (from -1.9 per cent y-o-y in October), but will likely slow sharply in December as the positives fade and because firms are likely to be saddled with higher inventory (at end-November) due to weaker sales, resulting in production shutdowns in December.”

The rural economy has been hurt much more than the urban economy due to the higher cash intensity of transactions in rural areas.

Services, which are more unorganised in nature, were hit more than manufacturing by the demonetisation, it said, adding that service sectors such as trade, real estate, hotels and restaurants, construction and transport have a higher share of the unorganised sector. Demonetisation has hit export volumes a lot more than imports.

Surprise Index

“Demonetisation has hurt cash-intensive export sectors such as gems & jewellery and textiles. Import volumes have been relatively stable, but we believe a slowdown is likely in the coming months as gold imports and domestic demand weaken further,” according to Nomura.

The Nomura Economic Surprise Index for India (NESII) — capturing the surprise (quantum and direction) in key economic data releases compared with the consensus view) fell in mid-December from mid-November, indicating that incoming data have surprised consensus expectations negatively.

“Given the negative momentum in NESII, the risk of further negative data surprises in the coming month appears more likely,” according to the report. The Nomura RBI Policy Signal Index moved closer to the neutral zone (on hold) in December, suggesting that global factors (narrowing interest rate differentials and higher oil prices) are constraining the RBI. “We expect a continued domestic slowdown to tilt the RBI’s decision in favour of a” 25 basis points repo rate cut in February, Nomura added.