The fairly sharp deceleration in Q4FY17, when the economy clocked a real GVA growth of just 5.6% y-o-y, is disappointing, even if it was anticipated the impact of demonetisation would linger on.
The fairly sharp deceleration in Q4FY17, when the economy clocked a real GVA growth of just 5.6% y-o-y, is disappointing, even if it was anticipated the impact of demonetisation would linger on. Some of this, though, is thanks to the high deflator and also the fact that Q4FY16 growth was bumped up in the latest growth estimates, making for an unfavourable base. Even if the damage wasn’t as severe as the real GVA numbers suggest, there’s no denying the slowdown. GDP data corroborates what the high frequency indicators—volumes for commercial vehicles, cement, railway freight and capital goods—were telling us all along, that the economy was decelerating even before demonetisation made things worse. The shortage of cash clearly hurt sectors like construction, trade, and manufacturing. And shorn of government spends, which soared 32% y-o-y, GDP would have risen at an anaemic 4% y-o-y.
Now, that there’s enough cash in circulation, and with a good monsoon, the business environment should improve. The abundant cash, together with higher allowances for government employees—and a likely pay commission award in states—and lower interest rates should all combine to drive up consumption demand in what will be an early festive season. Moreover, car sales have been fairly good and there has also been an increase in consumer credit. So, the growth in private consumption, which had decelerated to 7.3% y-o-y in Q4FY17 from 11.1% y-o-y in Q3, should bounce back.
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However, investments are going to remain sluggish, primarily because most promoters are over-leveraged and there is a lot of excess capacity. Also, lenders’ balance-sheets remain stretched. Investments grew at just 1.7% in FY17 and contracted in Q4FY17, resulting in a GDP growth in FY17 of 7.1%. To be sure, the slowdown, as also the fact that inflationary pressures are clearly not as strong as anticipated, might prompt RBI to consider cutting the repo rate when it meets to review monetary policy next week. But while that could drive the cost of capital lower, bringing relief to small businesses, it cannot spur any big recovery in the economy. One reason for this is that activity in the real estate and construction sectors—both of which have a big multiplier effect—remains sluggish. Unless, activity in this space picks up, it is hard to see a sustainable recovery and in the near-term, RERA could prove to be a dampener. And although the headline numbers look good, corporate results for Q4FY17 have been poor once you strip out the metal firms that benefitted from a low base; nearly 500 companies reported losses, the highest in several quarters. The economy can go only so far on one engine; so, it is not surprising the most optimistic GDP growth forecast for FY18 is 7.5%, with some predicting a growth of just 7.1%, the same as in FY17. But even to make this happen, the government needs to spend heavily. For that to sustain, while sticking to the fiscal deficit target, tax collections have to increase significantly. The demonetisation dividend that the finance ministry has been talking of—in the form of an increased tax-compliance—has to kick in. And banks have to make substantial progress in resolving the twin balance-sheet problem—right now, with loans from telecom threatening to turn bad, that is easier said than done.