India: Where is the negative impact of demonetization? – Rabobank

Hugo Erken, Senior Economist at Rabobank, notes that the Indian economy grew by 7% in Q4 of 2017, which is surprising given that India was struck by a surprise demonetization operation in November 2016, replacing 86% of all currency in circulation.

Key Quotes

“Many indicators, such as economic sentiment and vehicle sales, show a rebound after the demonetization operation, but the initial drop is not visible in the headline GDP figure.”

“The most important explanation why demonetization did not produce a big dip in the GDP figures might be found in the quality of Indian statistics. Especially the informal sector, which has borne the brunt of the demonetization operation due to cash-dependency, is underrepresented in the national accounts.”

“The gap between former and current liquidity levels is still substantial and we believe the negative effects might reveal themselves in upcoming revisions of GDP or when more reliable informal sector data is released next year. As for now, we stick to our forecast and expect the Indian economy to grow by 5.5% in FY2016/2017 and 8.2% in FY2017/2018.”