Despite a slowdown in India's GDP growth in short run due to cash crunch, India's growth rate will still be higher than China's in the medium term, according to Fitch Ratings.
In a statement, the credit rating agency said it expects India's GDP growth trend higher than China's in the medium term.
"In India we expect GDP growth to accelerate in FY2018 on the back of reform implementation, monetary easing of the past year and infrastructure spending, while in China a continued increase in leverage in the broader economy is more and more becoming a burden for growth," Thomas Rookmaaker, Director in Fitch's Asia-Pacific Sovereigns Group said.
"In China, we forecast real GDP growth of 6.4 per cent in 2017, down from a projected 6.7 per cent in 2016, due to the impact of recent macro-prudential tightening measures targeting the housing market," he said.
In October 2016, Fitch forecast 7.4 per cent growth for the current fiscal for India. Fitch also added that the growth would accelerate to eight per cent only by 2018-2019, on account of a lagged impact of monetary easing.
On the impact of demonetisation on the Indian economy, he said it would be negative in the short run and depended to a large extent on how long the cash crunch is going to take.
"A significant decline in the growth number for this quarter is highly likely, but for the fiscal year as a whole the decline may still be relatively moderate," he said.
There are many elements to the demonetisation, which makes it difficult to quantify the impact on real GDP growth and explain the wide range of forecasts by different analysts, he said.
According to him, on the positive side, the demonetisation may improve the fiscal position to the extent more earnings would be declared and a transfer was possible from the RBI to the government of the seigniorage (profit from the difference between the face value of the currency and cost of production) earned from unchanged notes.
A stronger revenue intake would be positive from a rating perspective, as the fiscal position forms the Achilles' Heel in India's sovereign credit profile, given the high general government debt burden and fiscal deficit compared with peers.
"Beyond the immediate policy issues of managing the cash crunch as best as possible and trying to mitigate the worst side-effects, it would be interesting to see what further steps the government will take to formalise the economy and structurally generate higher government revenues," Rookmaaker said.