India set to be Asia's standout economy as demonetization effect ebbs, HSBC says

India is expected to be one of Asia's standout performers this year, as the growth outlook for the broader region looks challenging due to subdued trade, tighter financial conditions and weak capital expenditure, according to a new report from HSBC.In a comprehensive report on Asia's outlook for the year, HSBC noted India could grow at an annual rate of 7.1 percent for fiscal 2018 and 7.6 percent for fiscal 2019, shrugging off any lasting effects from its program to remove 500 and 1,000 rupee bank notes from the financial system in November, labelled demonetization.

The prediction is higher than Asia's average 2017 growth forecast at 4.9 percent; China and the Philippines are expected to grow at 6.5 percent throughout the year, while Indonesia at 5.1 percent.

For the current fiscal year that ends March 2017, growth is expected at 6.3 percent due to the short-term impacts of India's cash crunch, revised down from HSBC's previous prediction of 7.5 percent. 

To be sure, India's fiscal 2018 will run from April 2017 to March 2018, while many of its peers use the calendar year to report annual data.

The positive outlook on South Asia's largest economy comes despite India's decision to wipe out 86 percent of the total value of currency in its cash-intensive economy late last year. HSBC's chief India economist, Pranjul Bhandari, noted in the report that investors were confident about India due to a much stronger macro environment.

"Inflation is in single digits, the twin deficits are under control and foreign exchange reserves are at comfortable levels," she said.

Key reforms, and follow-up actions to them, from the government are also on the cards for India in the calendar year 2017, which could lead to further long-term gains. Following the demonetization program, which was aimed at going after so-called black money or undeclared income, economists expect Narendra Modi's government to go after other avenues of black money including real estate, gold and foreign currencies.

The country is also set to implement reforms to replace its byzantine tax structure as early as April, though some market watchers reckon its eventual roll out could be delayed further.

"India is likely to witness two big 'reforms' over the year - the play-out of the demonetization drive and the implementation of the Goods and Services Tax (GST) bill," said Bhandari. "The hope is that both of these are followed up by necessary actions, which are critical to reaping long-term gains."

Meanwhile, Bhandari expects the early days of the GST implementation to be similarly disruptive like they were during the roll-out of the demonetization program.