India’s GDP (Gross Domestic Product) for the second quarter of FY17 grew at 7.3% versus 7.1% quarter-on-quarter and 7.6% year-on-year. The GDP data comes at a time when there are growing concerns that the demonetisation decision of Modi government may slow down the world’s fastest growing economy in the coming quarters. Fitch Ratings has already lowered India’s GDP growth forecast for this fiscal to 6.9 per cent from 7.4 per cent, saying there will be “temporary disruptions” to economic activity post demonetisation.
It said economic activity will be hit in the October- December quarter because of the cash crunch created by withdrawal and replacement of 500 and 1000 rupee notes that accounted for 86 per cent of the value of currency in circulation. “Indian growth has also been revised down to reflect temporary disruptions to activity related to the RBI’s surprise demonetisation of large-denomination bank notes,” Fitch said, as it revised real GDP growth forecast down to 6.9 per cent for 2016-17, from 7.4 per cent projected earlier.
DK Srivastava, Chief Policy Advisor, EY India, said “Examining the output side of GDP, there is an across-the-board reduction in the growth rates in 2QFY17 as compared to 1QFY17. There are minor improvements in agriculture, construction and public administration. 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. In fact, investment demand has fallen in three consecutive quarters and the magnitude of its fall has increased in successive quarters. Post-demonetization, 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.”
Aditi Nayar, Principal Economist of ICRA, said, “GVA expansion in Q2 FY2017 was marginally lower than our expectation (7.2%), led by lower-than-anticipated agricultural growth and a contraction in mining. Both GDP and GVA growth decelerated in Q2 FY2017 relative to Q2 FY2016. The initial data for Q2 FY2017 imparts a further downside to our GDP and GVA growth forecasts of 7.5% and 7.3% for FY2017, which we had revised downward post-demonetization. A near-normal monsoon boosted agricultural growth to 3.3% in Q2 FY2017 from 2.0% in Q2 FY2016, which is nevertheless much lower than the extent of rise in kharif output projected by the First Advance Estimates of crop production. The deceleration in manufacturing growth in Q2 FY2017 relative to Q2 FY2016 was in line with our expectations, reflecting the lagged effect of a rise in commodity prices on earnings, amid modest demand. Nevertheless, the GVA growth for the manufacturing sector has been significantly higher than the volume growth revealed by the IIP for several quarters, partly led by the decline in input costs for corporates in some sectors. Mirroring the weakness in investment activity and exacerbated by an unfavorable base effect, gross fixed capital formation recorded a YoY contraction in Q2 FY2017, in line with the de-growth in the output of capital goods and the Central Government’s capital expenditure. A sharp contraction in the subsidy outgo of the Central Government in Q2 FY2017, led to a healthy expansion of indirect taxes less subsidies, boosting GDP growth above the pace of GVA expansion. GDP growth was supported by private and government consumption activity in Q2 FY2017, as well as a smaller drag from net exports.”