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How One Economist Predicted India’s Growth Slump To 5.7% And What He Says About The Next Quarters

Hugo Erken, the only economist to have predicted India's growth slump, is based in the Netherlands.

01/09/2017 12:01 PM IST | Updated 01/09/2017 1:14 PM IST
Hugo Erken/Rabobank

While the Bloomberg and Reuters surveys had predicted that India's growth rate would be 6.5 percent and 6.6 percent respectively, it was a senior economist based in the Netherlands who nailed the figure at 5.7 percent for the first quarter of the current financial year.

In an interview with Livemint, Hugo Erken, senior economist at Rabobank's RaboResearch Global Economics and Markets, explained how his prediction was informed by demonetisation, the Modi government's ban on ₹500 and ₹1,000 currency notes, as well as the "negative and decreasing" growth of bank loans, party due to the build up of stressed assets.

"At Rabobank, we use NiGEM, an econometric world trade model, for our economic forecasts. Partly the sluggish consumption in private sector was expected due to lasting impact of demonetisation. This was visible in the previous quarter as well," he said.

Erken also explained that the Goods and Service Tax (GST) and demonetisation would continue to hamper India's GDP growth over the next two quarters of the current financial year, but that it would eventually pick up in the October-December quarter. "We think that the reforms undertaken by the Modi administration so far are will generate a positive impact on growth. Also, by the end of year, transitory and negative impact of GST, as well as demonetisation, will peter out," he told the newspaper.

Reflecting on the impact of demonetisation, Erken said that while it was disruptive for India in the short-term, as the GDP numbers show, it would ultimately benefit the country.

"I think it is little bit too early to say if the exercise was useful. We still have to see what will eventually happen with tax collection and revenues. Personally, I think it was a bold decision, but in the end it will be beneficial to India because of continuing formalization of the economy," he told Livemint.

India's financial calendar is made up of four quarters: January, February and March (Q1); April, May and June (Q2); July, August and September (Q3); and October, November and December (Q4).

Erken told Bloomberg that the impact of demonetisation would be felt for a few quarters. "The high level of non-performing assets are contributing to subdued private investments," he said.

The GST, according to Erken, would influence the second quarter's GDP, which he predicted to be near 5.9 to 6 percent. The economist said that GST would also impact India's GDP growth in the July-September quarter.

For the final quarter of October to December, Erken told Livemint, "GDP growth will pick up quite rapidly to somewhere near 8%..."

Bloomberg reported that when Erken is not making financial predictions, the economist plays in an indie/rock/pop band called Overdwar.

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