India will rejoin the ranks of the fastest growing major economies in the world next fiscal year, even as a massive cash crunch is expected to drag growth lower in the current year.
In the short-term, experts predict a sizable dent to growth in the final two quarters of fiscal 2017, led by a sharp drop in consumption as a result of the government's attempts to crack down on undeclared income and counterfeit notes. Deutsche Bank expects India's overall growth to slow to 6.5 percent on-year in the current fiscal year.
By contrast, Deutsche Bank expects the Philippines, another major Asian economy, to grow 6.8 percent in 2016. An exact comparison between the two countries, however, is somewhat complicated since the Philippines uses a calendar year to report economic data, while India calculates its fiscal year from April to March.
India demonetized 86 percent of total value of currency in circulation in a country that is heavily reliant on cash, bringing daily life to a halt.
Prime Minister Narendra Modi anticipates some relief early next year. On Monday, Reuters reported activity in India's services sector contracted last month, with the Nikkei/Markit Services Purchasing Managers' Index sinking to 46.7 from 54.5 in October. A reading below 50 indicates contraction.
"We see this as a one-off," Taimur Baig, chief Asia economist at Deutsche Bank told CNBC. "There won't be a major permanent loss of activity or wealth (and it will) rebound by the time the dust settles in March, April of next year."
The recovery will be supported by growing agricultural demand due to a better-than-expected monsoon season in fiscal 2017, higher wages for public servants due to a wage bill passed in June 2016 and increased public spending, Baig said.
Deutsche Bank's forecasts show private consumption is expected to grow by 8.1 percent on-year in the 2018 fiscal year. In fiscal 2017, private consumption is predicted to grow only 5.9 percent on-year.