A major challenge with demonetisation is the absence of a comparable template from another country where such a radical reform was passed, says Jahangir Aziz, Asia Economic Research at JP Morgan.
In an interview with CNBC-TV18 he said everyone is waiting for uncertainties to clear with respect to the impact that demonetisation will have on the economy in the short and medium term.
On the second quarter gross domestic products (GDP) growth number, due to be released later today, Aziz said that his estimate in slightly below the market consensus at 7.3 percent.
Below is the verbatim transcript of Jahangir Aziz's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Before I ask you about the gross domestic product (GDP) number which will be not of top of mind interest for the markets, what are foreign investors telling you post the demonetisation, how are they approaching India and its macros?
A: Everyone is basically trying to wade through the uncertainties both of the near-term and short-term impact of the demonetisation, not just on liquidity and banks, which is something that has pre-occupied markets over the last few days but also on the economy and all of this people are trying to make sense whether or not this changes the way businesses are run in India or this is simply a liquidity shock and business goes back to usual after the liquidity shock is gone. We do not have any clarity on any of these factors. We are week three on a process which most likely will extend to months. I think like the rest of us, we are sitting on the sidelines, watching events unfold and trying to make sense of the uncertainty.
Latha: Are foreign investors looking at it as a bold reform measure or are they looking at it as reform gone awry?
A: It is very difficult to use these terms largely because we do not have any template in history of an economy of this size going through a shock therapy of this kind on demonetisation. So if we did have a template for other countries that if you compare in single experiment, then we could start ascribing adjectives to the reform process.
So I think the countries that have gone through these kinds of demonetisation have been much smaller, less complex and typically economies that have had seriously large hyperinflation, which is not the case in terms of India.
Without template, it has been difficult for most analysts outside of India to see what is the reform. Whether it is a bold reform or not, whether it has gone awry or not, it is very difficult to say but what am I assessing against, what is my benchmark I don’t have it.
Sonia: For today's GDP data, what is your expectation? It doesn’t assume so much importance now but nevertheless and also how much would you be scaling down your FY17 and FY18 GDP estimates?
A: I think we are slightly below market consensus at 7.3 to a large extent we are below consensus largely because we think that government consumption is probably going to dip a little bit more than what the market has based on spending numbers that we have seen through at calendar year Q3.
I think in terms of scaling down Q4 calendar and Q1 calendar, we are still trying to grapple with these numbers. We do not have a single data points on real activity beyond weekly prices and everything else is just anecdotal at this point in time.
Depending upon how successful this experiment is, we will have to figure out what the near-term and medium-term shocks are but at this point in time, I think there is a serious amount of uncertainty regarding the impact on the real economy where both the near-term and the medium-term there is a serious degree of uncertainty regarding how monetary policy reacts next week and how the budget reacts next year.