Nomura sees V-shaped recovery for India’s GDP

Shrugging of concerns regarding a prolonged contraction in economic growth due to demonetisation led demand slowdown, global investment bank Nomura said the Indian economy would see a ‘V-shaped’ recovery during the second half of FY18. According to it, the growth is poised to see a sharp bounce back due to the pent up demand post remonetisation, stronger consumption due to larger fiscal gains for the government, wealth redistribution towards poorer households and sharply lower lending rates. While Nomura expects the economy to grow 6.5 per cent in FY17, the growth is expected to accelerate to 7.4 per cent in FY18.

The fear of demonetisation hurting long-term growth according to Nomura was based on the premise of a large amount of wealth destruction. “Our own estimates in November were that it would lead to wealth destruction of 1.9 per cent of GDP. However, news reports suggest that more than 95 per cent of the old notes have been deposited into banks – which is consistent with the currency in circulation data – the extent of wealth destruction (measured by unreturned old notes) is likely to be fairly small at 0.3 per cent of GDP,”said Sonal Verma, India economist at Nomura.

The financial service major believes that remonetisation will reach optimal levels to support transaction demand by the second quarter of this year. As the economic engine fires up once again, it expects the current hoarding behaviour to slowly fade and activity to normalise.

“Discretionary consumption demand, which was postponed due to the cash shortage created by demonetisation, will bounce back and could rise sharply due to the release of pent-up demand,” Nomura said.

It also expects growth to benefit on account of redistribution of wealth towards poor.