GDP growth to slow down to 6.5% in Q3: Icra

Industrial growth is expected to slow down to 4% in Q3FY17, down from 8.6% for Q3FY16

Economic growth is likely to have slowed down to 6.5 per cent in the third quarter (Q3) of 2016-17, down from 7.2 per cent in the third quarter of 2015-16, as economic activity is likely to have been disrupted after demonetisation, says Icra. 

Gross domestic product (GDP) grew by 7.3 per cent in the second quarter of FY17. GDP estimates for the third quarter are due to be released on February 28 by the Central Statistics Office (CSO).

Gross value added (GVA), which excludes product taxes and subsidies, is expected to slow down to 6.2 per cent in Q3FY17, down from 6.9 per cent in Q3FY16, says the rating agency. In its recent assessment, the Reserve Bank of India (RBI) had also lowered its estimate of GVA to 6.9 per cent for FY17, marginally lower than the CSO’s Advance Estimates, which had pegged GVA to growth at seven per cent.

“Icra expects the note ban to selectively affect some of the sub-sectors of industry and services, dampening the expansion of the GVA at basic prices to 6.2 per cent in Q3FY17 from 6.9 per cent in Q3FY16,” says Aditi Nayar, principal economist at Icra.

Industrial growth is expected to slow down to four per cent in Q3FY17, down from 8.6 per cent for Q3FY16, with GVA by the manufacturing sector forecasted to decline sharply to five per cent in Q3FY17, down from 11.5 per cent registered over the same period in the previous financial year.

While the mining sector is expected to do better, largely on account of recent uptick in commodity prices, the cash-intensive construction sector is expected to be worst hit after November 8, says Icra.

With household consumption likely to have been curtailed, the services sector growth is also expected to ease to eight per cent, down from 9.1 per cent. While bank deposits have surged, non-food credit has plunged to 5.3 per cent. Icra points out that “high growth of the government of India’s non-interest non-subsidy revenue expenditure and cargo handled at major ports, as well as the mild turnaround in service sector exports, would have supported the overall service sector expansion in Q3 FY2017.”

The agricultural sector is likely to spring a surprise. “the robust kharif harvest is expected to contribute to a turnaround in the performance of agriculture, forestry and fishing to a growth of five per cent in Q3FY17 from the one per cent contraction in Q3FY16” says Nayar. But while output may show higher growth, the crash in prices of vegetables post note ban could have impacted farmer incomes and thus depressed rural demand

While analysts are eagerly awaiting the third quarter numbers to assess the extent of disruption in economic activity after demonetisation, Nayar sounds a note of caution.

“Since the early estimates of quarterly GVA would rely heavily on available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the first estimates of Q3FY17 GVA growth may not fully capture the impact of the note ban. Subsequent estimates that draw from wider data sources, may well revise Q3 FY2017 growth downward,” she says.