Workers harvest green peas in a field in Amritsar, Punjab, India, on Sunday, Jan. 22, 2017. The Feb. 1 budget is an opportunity for Indian Prime Minister Narendra Modi to unveil measures that will fulfill his 2014 guarantee of growth and more jobs. If he fails, it will slow consumption and leave the rural economy struggling, denting his credibility -- already hit by the abrupt cash clampdown -- on tough policy measures. Photographer: Dhiraj Singh/Bloomberg
© Bloomberg

India said its economy remained on track in the final quarter of last year, despite the impact of Prime Minister Narendra Modi’s decision to ban most of the country’s circulating cash.

The strong quarterly performance surprised independent economists, who had expected more of a slowdown due to the shock from November’s cash ban. “It’s a surprise because it doesn’t sync with the high frequency data we’ve seen,” said Sajjid Chinoy, economist for JPMorgan. “Let’s wait for the next quarter numbers.”

India’s economy grew 7 per cent year on year in the three months to December, according to official figures released on Tuesday, down only slightly from 7.4 per cent growth in the previous quarter. A Reuters analysts’ poll had forecast growth of 6.4 per cent for the October-December period.

Indian officials said the data vindicated their claim that the dramatic ban on 86 per cent of the country’s cash — part of a crackdown on illicit and unaccounted wealth — would have only a temporary economic impact. The government estimated the economy would grow 7 per cent in the current financial year, ending in March.

“The number completely negates the negative speculations you have made about the impact of demonetisation,” Shaktikanta Das, a finance ministry official, told journalists.

But many analysts believe the figures — which come at a sensitive time ahead of a crucial state election — understate the true disruption of demonetisation, because the businesses hardest hit were informal enterprises that historically operated mostly in cash and are tough to measure.

Mr Chinoy said India’s economy was buoyed in the turbulent end to the year by strong growth in agriculture, which expanded 6 per cent year on year, compared with 3.8 per cent in the previous quarter, and a robust 12 per cent year-on-year rise in government spending. Manufacturing growth was 8.3 per cent year on year, from 6.9 per cent in the previous quarter.

But growth in real estate — a sector previously notorious for under-the-table cash deals — professional services and financial services slowed sharply to 3.1 per cent, from 7.6 per cent in the previous quarter. Construction growth dropped to 2.7 per cent year on year, down from 3.4 per cent in the previous quarter.

“The headline number makes it look like there is no impact of demonetisation,” Mr Chinoy told Indian television. “But below the surface, there has been some drop-off.”

The Indian government uses the financial results of large private companies to estimate manufacturing and service industries output, and to extrapolate industrial production estimates for small and medium enterprises.

But after the cash ban, the fortunes of India’s formal and informal sectors diverged sharply, reflecting the dramatic difference in their dependence on cash for transactions such as paying suppliers or employees.

Many informal businesses, which account for about 40 per cent of India’s GDP but provide 75 per cent of employment, were forced by the cash crunch to suspend operations and lay-off employees, many of whom were forced to return to their rural villages.

“The majority of the slowdown was concentrated in the informal sector, which is more cash-driven,” said Ritika Mankar Mukherjee, economist with Mumbai-based Ambit Capital. “But the central statistics office really has no way of actually figuring out what is happening in the informal sector. They don’t have ways to capture its pulse.”

In a note ahead of the data release, Goldman Sachs warned the estimates “may not capture the downturn in the micro, small and medium enterprises and the rural economy that has been caused by demonetisation”.

Goldman also said the figures would probably have been buoyed by India’s annual Diwali festival, a peak period for consumption in India, which fell in October last year. “Part of the decline in activity post demonetisation may have been cushioned by a good festive season,” Goldman Sachs said in its note.

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