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Deepali Bhargava, India Assessing Impact on GDP From Demonetization-A J-curve Effect, CREDIT SUISSE

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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, LEGAL ENTITYDISCLOSURE AND ANALYST CERTIFICATIONS.22 November 2016Asia PacificFixed Income ResearchEmerging MarketsIndia: Assessing impact onGDP from demonetization –a J-curve effectResearch AnalystsDeepali Bhargava65 62125699[email protected]Deep cut to growth over next six months.We have cut our FY2016-17 GDPforecast to 6.9% from 7.8% earlier on supply-side disruptions in 3Q and 4Q ofthe current fiscal year.Also a drag on 2017-18 growth, but not as much.We also cut growthforecast for FY2017-18 to 7.4% yoy from 8.0% on the view that there will be alasting economic impact from destruction of wealth for higher income segmentof population. Although their marginal propensity to consume is likely low,drying of property purchase by the high income group can have significantknock-on effect on the real economy. We think there will be some offsets tocushion growth in 2H.Easier liquidity and credit conditions should support growth in 2H.Weestimate that bank deposits, on a durable basis, can go up by 2% of GDP,which should result in improved transmission. As a result lending rates couldfall by 30-60 bps. We estimate this could add 20-25 bps to GDP in 2H'FY2017-18.Potential lift from fiscal policy. Recorded GDP could be higher as peopledeclare greater parts of their income, which in turn should improve taxcollections. We estimate 5% shift of the informal economy to formal couldresult in higher revenue gains of 0.3% of GDP next year for the government.The increase in spending could be even bigger if the centre moves to a rangetarget for fiscal deficit, and the RBI distributes any gains from demonetization.Positive for bonds and money market.We expect bonds to rally on strongdemand from banks, bucking the global trend in fixed income.Figure 1: India – a cash economyFigure 2: Multiplier effect in 197860%80%100%200720082009201020112012Consumer payment by value (% oftotal transactions)Other paperCardElectronicCash0.30.40.50.60.70.80.911.51.71.92.12.32.52.72.93.1Mar-75Mar-77Mar-79Mar-81Money multiplierCash to deposit ratio (rhs)DemonetizationSource: Euromonitor, Credit SuisseSource: CEIC, Credit Suisse
22 November 2016India: Assessing impact on GDP from demonetization – a J-curve effect2Damage on growth from demonetization likely a J-curve effectThe government decided to scrap high value currency notes earlier this month, with a viewto eliminate the 'black money'. We think high value currency demonetization will have anegative impact on the economy in two main ways -1) Temporary disruptions in a range of economic activities resulting from cash shortages,2) Beyond the temporary disruptions from shortage of new currency availability, we seethis move as a wealth tax and think following factors will result in a more lasting disruptionin economic activity:Wealth destruction:We estimate wealth destruction of about 1.5-2% of GDP out oftotal demonetized currency worth 10.5% of GDP. The World Bank estimated the size of

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Term
Fall
Professor
azgar
Tags
Financial services, Credit Suisse, Financial adviser, Credit Suisse Securities

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