Demonetisation had a pronounced and rather broad-based adverse effect on the economy in the fourth quarter of last fiscal, official data showed on Wednesday, even as the agriculture and mining sectors held up and consumption, despite a sequential slowdown, was still robust. Manufacturing, construction and major services were hit by the currency squeeze, pulling down real gross domestic product (GDP) growth in Q4FY17 to 6.1% from 7% in the previous quarter. Construction contracted 3.7% in the final quarter of last fiscal, compared with a growth of 6% in the year-ago quarter.
GDP grew 7.1% in FY17 versus a revised 8% (7.9% as per previous estimate) in FY16, the Central Statistics Office said, releasing its provisional estimate; its two advance estimates earlier had predicted the same growth for FY17. A downtrend in GDP growth was setting in even before the note ban and the event exacerbated it. India’s GDP growth in the January-March quarter was lower than China’s 6.9% for this period, depriving the country of the fastest-growing major economy status, albeit temporarily.
Analysts saw a likelihood of the Reserve Bank of India providing room for the policy guidance to soften next week, given the tempering of growth and inflation projections. The recent revision of the IIP and WPI series with 2011-12 as base year hasn’t significantly altered the rates of real GDP expansion for later years, disproving many who predicted otherwise. This was because the push effect on real GDP from higher IIP growth figures and the (largely) lower inflation figures from the respective new series has been less strong than assumed. The effect of new series has been “mediated”, chief statistician TCA Anant said; for example, he said, IIP data was used for measuring gross value added (GVA) in manufacturing only to the extent of the non-corporate sector and if annual survey of industries data wasn’t available.
The lower-than-expected real GDP growth in Q4FY17 was also due to the firming up of commodity prices, which drove up the WPI. The GVA growth in Q4FY17 was pegged at just 5.6%, as an unfavourable base also impacted the estimate (GVA grew a robust 8.7% in Q4FY16). The GVA expansion slipped sharply to 6.6% in FY17 from 7.9% in FY16.
Pertinently, although growth in real term slipped in FY17, nominal GDP expansion touched 11% in the year against 9.9% in FY16, owing to higher inflation, especially at the wholesale level. Despite several policy initiatives taken by the Narendra Modi government to promote investments and some pick-up in public investments, gross fixed capital formation (GFCF) has ceded its share in GDP from 31.2% in the first quarter of FY16 to just 28.5% in the final quarter of FY17. In fact, for the first time in the new GDP series, GFCF contracted in Q4FY17 — it was 2.1% less than in the year-ago quarter.
Unless the government stepped up consumption substantially and private consumption also picked up since the third quarter (it has slowed a bit in Q4 owing to the note ban), FY17 growth would have been even lower. The share of private consumption expenditure in GDP went up sharply from 53.3% in Q1FY16 to 57.3% in Q4FY17.
“Excluding agriculture and government spending, Q4GVA expanded by just 3.8% from a year earlier,” noted A Prasanna, economist at ICICI Securities Primary Dealership. According to Aditi Nayar, principal economist at Icra, “Demand and purchases during the festive season and a favourable base effect appear to have couched the impact of the note ban on consumption growth in Q3 FY2017, which was followed by a sharp dip in Q4 FY2017.” Helped by a good monsoon, the agricultural sector posted a huge jump in growth as it expanded by 4.9% during FY17, compared to a dismal 0.7% in the previous year. In the fourth quarter of last fiscal, the agriculture GVA rose 5.2% against 1.5% in the year-ago period. Radhika Rao, group economist at DBS, said: “Agriculture and public administration have been the main drivers of growth, barring which the momentum on the ground is soft — especially manufacturing, construction and financial services.”
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Prasanna added: “While we agree that a slowdown in H2, concentrated in Q4, fits in with the theme of a slowdown post-November currency swap, the extent of slowdown is puzzling… Further, the GDP deflator for Q4 has come in at 5.7%, which is clearly at odds with the WPI and CPI data for Q4.”
Shubhada Rao, chief economist at Yes Bank, said the fourth-quarter GDP growth reflects the lingering impact of demonetisation, but incremental data in April show that growth impulse was improving and economic activity was picking up on the ground. “We continue to expect the RBI to remain on pause, with any rate hikes ruled out.
However, the tone will be less hawkish given that both inflation and growth are lower than RBI’s projection,” she said. Most analysts pointed out that the biggest challenge was the near absence of private investment given the kind of stressed balance sheet of corporates and alarmingly high non-performing assets of the banks.