India's economy shrugs off cash crisis to post 7% growth

Trump threatens Indian engineers' American Dream
Trump threatens Indian engineers' American Dream

India's cash crisis has taken a surprisingly small bite out of its economic growth.

The country's gross domestic product grew by 7% in the quarter ended December, according to figures released by the government on Tuesday. That's slower than the 7.4% expansion posted in the previous quarter, but a much better result than most analysts had forecast.

Economists had expected a sharp slowdown to result from Prime Minister Narendra Modi's abrupt decision to ban on all 500 and 1000 rupee notes -- the two largest denominations -- in early November. The shock move immediately took 86% of the country's cash out circulation, hitting key sectors of the economy.

Related: What happened when India trashed its cash

The GDP results mean that India has retained its title as the world's fastest growing major economy. Its rival China posted growth of only 6.8% over the same quarter.

But economists quickly raised doubts over the official government data -- the accuracy of which has been questioned in the past.

"The strong figures confound survey data pointing to a larger drop in economic activity that appears to have persisted into 2017," wrote analysts at Fathom Consulting.

Analysts had predicted that India's growth would decline by as much as one percentage point in the two quarters after the cash ban, with institutions like the IMF and even India's own central bank revising their forecasts downward.

The government, meanwhile, had insisted that its rupee ban would only cause a temporary slowdown, with members of Modi's cabinet repeatedly stressing that "short-term pain" will result in "long-term gain" as the system returns to normalcy.

The chaos that resulted from the cash ban has largely subsided in recent weeks.

"I won't say [things] are 100% back to normal, but they are getting close," Arundhati Bhattacharya, chairwoman of the State Bank of India, said on Tuesday. "The recovery has been quite sharp."

Anubhuti Sahay, head of South Asia economic research at Standard Chartered, pointed to auto production and manufacturing as sectors that have recovered after suffering from major slumps.

"But we still remain lower than [before the cash ban]," Sahay added, "which effectively implies that it has had a negative impact on economic momentum."

The objective of the government's rupee ban was to crack down on widespread corruption and tax evasion. It's not yet clear whether it will be successful.

Related: India says its economy will bounce back from cash crisis

Sahay said that the economy could take another short-term hit if lawmakers move ahead with the national sales tax that is slated to replace India's complicated web of state tariffs.

The Goods and Services Tax (GST), which promises to be hugely positive over the long run, has been hit by multiple delays and is unlikely to pass before July this year.

"Near-term pains will get reflected in terms of slower economic activity and probably higher inflation," she said.

-- Mallika Kapur and Rebecca Wright contributed to this report.

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