RISK MANAGEMENT

India's Demonetization Experiment to Hold Back GDP Growth in Next Two Quarters

High-frequency indicators suggest that growth in India will slow sharply in the December to March quarters, reports Moody's Analytics, the economic forecasting arm of the credit ratings agency. The proximate cause is the government's bold experiment of withdrawing 500- and 1,000 rupee notes from circulation in November.

The recent composite Purchasing Managers Index, which includes manufacturing and services, declined to 47.6 points in December, from 55.4 points in October. Vehicle registration fell 11% over the month of December as backlogs of older car models increased, suggesting car production will slow. Hiring intentions have also slowed for the first quarter of 2018, according to the latest Manpower survey of employment conditions.

Moody's Analytics expects the hit to growth to be shor term. Economic activity should return to normal by the June quarter, although it predicts that uncertainty will persist around the fallout from the demonetization policy. 

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