India's Economy Faces a Bumpy Road to Recovery

  • Survey pegs consumer inflation at lowest since November 2014
  • Hindustan Unilever sees ‘temporary pain’ from Modi cash ban

India Braces for a Choppy Economic Recovery

India’s economy is set for a choppy recovery from the world’s most sweeping currency policy change in decades.

Inflation continued to slow in December as the cash ban squelched demand while a volatile factory output gauge rose in November, according to Bloomberg surveys before data due at 5:30 p.m. in New Delhi on Thursday. Companies are bracing for lower sales and employment and bond-market swings are at the highest level since 2013.

The outlook is complicated by the government’s forecasts of a surge in revenue from its fight against tax evasion and implementation of a landmark national sales levy due by September. Analysts are grappling to assess the implications of Prime Minister Narendra Modi’s Nov. 8 decision that canceled 86 percent of currency in circulation and could swing state elections next month.

"2017 will be a year of recovery, but it is likely to be uneven," said Teresa John, an economist at Mumbai-based brokerage Nirmal Bang Equities Pvt. The $2 trillion economy may need until the October-December quarter to "return to complete normalcy," she said.

Consumer prices probably rose 3.53 percent in December from a year earlier, the slowest pace in 25 months, according to the median of 30 estimates in a Bloomberg survey of economists. Industrial production is expected to rise 1.5 percent in November, with data flattered by the previous year’s 3.4 percent drop.

Gross domestic product will grow 7.1 percent in the year through March, the slowest pace in three years, the government forecast on Friday. That doesn’t take into account the impact of Modi’s move, which economists in a Bloomberg survey said will dampen growth to 6.8 percent. Consumption is set to drop to 59.1 percent of GDP from 59.5 percent last year -- and again that’s before considering currency shortages in an economy where 98 percent of consumer payments are made in cash.

Investment is poised to drop and foreign funds have sold more Indian stocks and debt than they bought this month. The 50-day historical volatility in the 10-year sovereign bond rose in January to its highest since 2013.

This was supposed to be a good year for growth as farm output was expected to rebound after successive droughts and higher salaries for government employees would boost consumption, analysts at CARE Ratings Ltd., including Madan Sabnavis, wrote in a report last week. "However, the optimistic picture altered post the announcement of demonetization as economic activities across all sectors were adversely affected due to acute cash crunch," they said.

‘We Need to be Cautious’

Hindustan Unilever Ltd. -- India’s biggest consumer goods company -- sees "temporary pain" that will ease depending on how quickly the cash shortages abate. Mahindra & Mahindra Ltd. -- the largest SUV-maker -- sees a "gradual pick up in demand starting next few months." Tata Motors Ltd. says sales will be hit through March 2017.

Automobile sales fell 19 percent in December, the biggest drop in 16 years, according to the Society of Indian Automobile Manufacturers. Sales of scooters and motorcycles -- a key indicator of rural demand -- fell 22 percent, the biggest monthly contraction on record.

"Demonetization has created a ripple towards the end of 2016, which may send waves well into 2017," analysts at consultancy firm Nielsen wrote in a report last month. "Hence, as we look into the future, we need to be cautious."

India’s small business are particularly vulnerable. These industries lost a third of their jobs in the first five weeks of the cash ban, according to a survey by the All India Manufacturers’ Organisation, which predicts job losses will rise as high as 60 percent by March.

Higher Taxes

Modi’s move will boost revenue collections, help India increase spending on welfare projects and cut taxes, Power Minister Piyush Goyal said in an interview on Friday. Deposits have flooded into banks, helping them lower lending rates.

India’s rollout of a national goods and services tax -- targeted April 1 by the government but more likely toward September -- is also projected to boost collections in the long term but more immediately could inject further uncertainty.

"The near term could be messy, with adjustment costs for the private sector," said Pranjul Bhandari, chief India economist at HSBC Holdings Plc, referring to the introduction of the GST. "Both reforms have Indian-style characteristics; an imperfect version is initially implemented and is likely to be disruptive. The quantum of long-term gains will depend on follow-up action."

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