India’s gross domestic product (GDP) grew at a lower-than-expected 7.3% in the September quarter while the gross value added (GVA) increased only 7.1% despite a massive push from government spending, according to Central Statical Office data released on Wednesday. With the recent industrial production data and October core-sector figures reflecting continued sluggishness in mining and electricity — and to some extent, manufacturing — it is clear that demonetisation put a spoke in the economy’s wheel when it was anyway struggling to accelerate.
Seen from the output side, growth rates reduced in a broad-based manner in the second quarter of the FY17 over the first quarter (which saw GVA expand 7.3%); agriculture and construction saw minor improvements, though.
Given the grim economic forecasts for the third and fourth quarters of this financial year by many analysts and rating firms citing the prevailing acute cash crunch that might not ease soon, it mustn’t be a solace India still remained the fastest-growing large economy — China’s GDP expanded 6.7% in the September quarter.
What portends bad days ahead is that both private consumption and overall investment have ceded their shares in GDP in Q2FY17, the latter massively: Gross fixed capital formation (GFCF), the closet proxy for investment, had been contracting since Q4 of last year. On an annual basis, it fell 1.9% in Q4FY16, 3.1% in Q1FY17 and a steep 5.6% in Q2FY17. Clearly, investments are in the doldrums, despite government doing its bid by upping capital investments in highways, ports and railways.
So it now seems more incumbent on the government to continue to pep up demand via its own spending: While the expected windfall receipts of Rs 1.5-2 lakh crore from the Reserve Bank of India and tax revenue from back money holders could improve the government’s balance sheet, a stuttering economy is a threat to it.
For the first time in eight quarters, nominal GVA growth, however, touched double digits in Q2FY17, after coming very close to it in the previous quarter. From a trough of 5% in the second quarter of 2015-16, the improvement in the nominal GVA has risen to 11.3%, having witnessed a steady expansion.
Some analysts said this suggested a crucial improvement in underlying economic activity, especially in times of a wedge between the wholesale and retail price indicators; however, the sustainability of this uptrend is doubtful so long as government spending continued to be the main growth driver. Chief economic adviser Arvind Subramanian said: “There is good news in the sense that real GDP growth has picked up, so there is a kind of steady improvement. There is some indication of some improvement in underlying strength in the economy which is reflected in the fact that nominal GDP growth has accelerated.” On the impact of demonetisation in the third quarter, Subramanian said it would be subject to a considerable amount of uncertainty.
Government final consumption expenditure (GFCE) grew 18.8% in Q1FY17 and 15.2% in Q2FY17. In fact, GFCE share in GDP increased a massive 2.2 percentage points to 13% between Q1FY16 to Q2FY17. However, it looks difficult to keep this growth rate. The Centre’s capex (Plan and non-Plan) has already declined 12.81% to R1,24,959 crore in April-October of FY17 against R1,43,329 crore in the year-ago period.
FY17 GDP growth forecast after the recent scrapping of 86% of the currency notes in circulation varied from an abysmally low 3.5% to a respectable 7.3% (compared with 7.6% in FY16). After the release of the Q2 data, former chief statistician Pronab Sen pegged the figure at around 6.5%. While private consumption has been dealt a blow by demonetisation, investment prospects seem even gloomier than in the September quarter, he added. Sen said while the kharif crop volume is expected to be higher than a year earlier, the drop in farm commodity prices following demonetisation has to be factored in while estimating farm sector growth in the quarters to come.
When the Q1 GDP data came in at 7.1% (on real GVA growth of 7.3%), sharply lower than 7.9% in previous quarter, government managers said the fall in growth was on account of higher subsidy expenditure, but in Q2 GDP growth outpaced GVA (7.1%) as subsidy outgoes were curbed and tax receipts remained buoyant.
According to DK Srivastava, chief policy advisor, EY India, “The fall in the growth of manufacturing, electricity and services is particularly disappointing. This may be due to continued weakening of investment demand and near-stagnation of export demand. Post-demonetisation, we expect a further weakening of the growth prospects, particularly in sectors which have a higher share of informal sector such as agriculture, construction and some service sectors.”
Although both the GDP and the index of industrial production (IIP) are different indicators — the former also captures value addition other than output — the divergence in the growth estimates for manufacturing continues to be stark. While gross value addition in manufacturing grew 7.1% in the September quarter from a year ago, the IIP data showed the sector’s output contracted 0.9% during the quarter. Discrepancies — the difference between the supply and demand side of GDP — rose to R34,059 crore between July and September from R26,232 crore in the previous quarter. However, it remained sharply lower than a massive R1,43,210 crore witnessed in the last quarter of 2015-16, which had caused a flutter then and raised doubts about the credibility of data collection mechanism.
Sunil Kumar Sinha, principal economist at India Ratings & Research, said: “(The Q2 GDP and GVA numbers themselves) would have warranted a re-look at the GDP/GVA growth of the FY17. And now (with demonetisation), the GDP/GVA growth will be much lower than our forecast of 7.8%. There are several areas of concern namely mining & quarrying, electricity, construction and even trade, hotel, transport and communications. Ind-Ra believes manufacturing growth during 2HFY17 will be much lower (than 8.1% in H1).”
CII director general Chandrajit Banerjee said: “The demonetisation move will act as a temporary setback to growth in the coming quarter but CII expects a rebound in investment, going forward, as the government is taking decisive measures to bring transparency in the system and is committed to improve the investment cycle.”