Demonetisation may pull down Q3 GDP growth below 6%

As per projections made by Soumya Kanti Ghosh, this would be lowest expansion in at least 7 qtrs

The note ban, enforced by the central government, might drag down growth in gross domestic product (GDP) to below six% in the third quarter of the financial year, if projections made by the International Monetary Fund (IMF) and State Bank of India Chief Economic Advisor Soumya Kanti Ghosh are correct.

A key finance ministry official concurs with them. 

The third quarter of the current financial year is the period when demonetisation took place. If the growth rate falls below six%, it would be the lowest expansion in at least seven quarters.

Ghosh said GDP growth in the third quarter would stand at 5.8%, against 7.2% a year ago and growth in the fourth quarter would be 6.4%, against 7.9% a year ago. 

“Overall, our estimate for the second half of FY17 GDP growth is 6.1% with a downward bias. We estimate GDP growth for the year at 6.6%,” Ghosh said. 

The IMF indicated on Wednesday that GDP growth in the third quarter of 2016-17 would be below six%. 

It pegged the growth rate at around 6% for the second half. For the fourth quarter, it said growth will be 6.2%. 

These indicate that third-quarter growth might not touch 6%. GDP in the fourth quarter is greater than in the third one, a fact that will be more pronounced this time due to the effect of demonetisation on the economy. 

The IMF has also scaled down India’s economic growth to 6.6% for 2016-17, from 7.6% estimated earlier. 

The finance ministry senior official pegged growth at 5.5% in the third quarter.

Ghosh said sectors such as construction, real estate, cement and fast-moving consumer goods were likely to witness a decline in sales in the third quarter and then a recovery. 

However, companies in construction - with a high share of government orders - were likely to be less impacted, he said.

The Central Statistics Office (CSO) has estimated the economy would grow 7.1% in 2016-17. But, since it did not take into account the impact of demonetisation, the CSO will come out with the second Advance Estimates and also third-quarter GDP figures on February 28. 

Ghosh said if one went by the CSO estimate, growth in the third and fourth quarters would be around 6.1% and 7.8%, respectively, which was impossible, given the extent of the liquidity shock that had led to drastic consumer spending cuts. 

As such, the CSO would revise downwards the estimates for 2016-17, perhaps for the first time, Ghosh said.

However, there are views also. Aditi Nayar of Icra said that GDP growth was likely to be 6.5% in the third quarter. While the note ban would selectively affect some sub-sectors of manufacturing and services, the robust kharif harvest was expected to contribute to a turnaround in the performance of agriculture, forestry and fishing, she said.

She pegged agriculture and allied sector growth at five% in the third quarter, against one% contraction in the corresponding quarter of the previous financial year.

“Since the early estimates of quarterly figures would rely heavily on the available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the first estimates of the third quarter might not fully capture the impact of the note ban. Subsequent estimates that draw from wider data sources might well revise the growth downward,” she added.