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Despite Demonetization, India will beat China in GDP growth: Fitch Ratings

chinaDespite a moderation in India’s GDP growth rate in the short term due to cash crunch, the Indian economy will still grow faster than that of China, global ratings agency Fitch said.

“We still expect India’s GDP growth to trend higher than China’s in the medium term,” said the agency, whose primary job is to advice bond buyers on risks involved in buying debt from countries and corporations.

It said India will see a slight decline in GDP growth rate in the year ending March 2017, but will bounce back next year.

“The impact on GDP growth is clearly going to be negative in the short run and depends to a large extent on how long the cash crunch is going to take. A significant decline in the growth number for this quarter is highly likely, but for the fiscal year as a whole the decline may still be relatively moderate,” it said today.

This dip will be followed by a pick up in growth next year as Fitch expects an acceleration in reform implementation in the country. Monetary easing — by way of easier availability of credit — and infrastructure spending will also help boost the Indian economy, it added.

China, meanwhile, is expected to continue to face issues with the high levels of debt in its economy.

“In China, a continued increase in leverage in the broader economy is more and more becoming a burden for growth,” it said, predicting that GDP growth in China will fall to 6.4% in 2017 from a expected 6.7% in 2016, “due to the impact of recent macro-prudential tightening measures targeting the housing market.”

JUGAAD

Though the cash crunch will act as a dampener on economic activity in India, Fitch said the people are finding ways around the problems.

“People find inventive ways around the cash crunch as well – there is always the art of jugaad. At the same time, this seems to suggest that demonetisation is a one-off event and is not likely to generate a significant structural shift of activity from the informal to the formal sector.”

It said the demonetisation may improve the fiscal position to the extent more earnings will be declared and a transfer is possible from the RBI to the government of the seigniorage earned from unchanged notes.

“A stronger revenue intake would be positive from a rating perspective, as the fiscal position forms the Achilles’ Heel in India’s sovereign credit profile, given the high general government debt burden and fiscal deficit compared with peers. Beyond the immediate policy issues of managing the cash crunch as best as possible and trying to mitigate the worst side-effects, it would be interesting to see what further steps the government will take to formalise the economy and structurally generate higher government revenues.”

On the immediate downside, it said the cash crunch is likely to cause a temporary delay of consumption and investment, disrupted supply chains, farmers being unable to buy inputs, and some loss in productivity due to time lost to deal with cash issues.

“There are many elements to the demonetisation, which makes it difficult to quantify the impact on real GDP growth and explains the wide range of forecasts by different analysts.”

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