Demonetisation effect: GDP growth enters slow lane in Q4 at 6.1%

GVA growth at 2-year low of 5.6%; Farming only bright spot

India’s economic growth fell to 6.1 per cent in the fourth quarter (Q4) of 2016-17 (FY17), primarily because of demonetisation adversely affecting economic activity. This was at least a four-quarter low. 

The sectors worst affected were construction and financial services. 

Without indirect taxes, growth figures would be more dismal. Gross value added (GVA), the difference between gross domestic product (GDP) and net indirect taxes, grew by only 5.6 per cent in Q4 — the lowest in at least eight quarters, according to official figures released on Wednesday.

The effect of demonetisation was evident in the figures, with growth being pushed primarily by agriculture and government spending. In Q4, excluding agriculture and government spending, GVA grew a mere 3.8 per cent, down from 8.4 per cent in Q1.

In FY17, economic growth was at a three-year low of 7.1 per cent. The previous year, it was 8 per cent.

Economists now expect the Reserve Bank of India (RBI) to change its monetary stance, even if it does not cut the repo rate. The monetary policy committee will meet on June 7. Chief Economic Advisor Arvind Subramanian said demonetisation had a temporary impact. “According to both the IIP (Index of Industrial Production) and the National Income Accounting data, deceleration has been happening since July,” he said.

Prime Minister Narendra Modi had announced the banning of the old Rs 500 and Rs 1,000 notes on November 8 last year.

The discernible impact of the slow growth was on the private sector.

Construction activities contracted 3.7 per cent in Q4 against 3.4 per cent in Q3. Financial services, real estate and professional services rose 2.2 per cent, against 3.3 per cent in Q3.

“These sectors are generally stable and robust, but were adversely impacted by demonetisation,” said D K Srivastava of EY. He added credit growth in financial services catering to the informal sectors slowed down, and the economy would take at least another quarter to recover from the impact of demonetisation.

However, Chief Statistician T C A Anant claimed understanding the impact of the note ban was far more complex. “Determining how a particular policy — from the web of policies — affects growth is a complex task,” he said.

While banks were flush with funds, due to subdued credit off-take, GVA growth of financial services declined, said Devendra Pant, chief economist with India Ratings.  

The finance ministry was confident that the economy would grow by 0.50-0.75 percentage points in the current financial year, compared to FY17. “The projection for next year is certainly a pickup by about half a basis point. We said relative to this year, it would pick up by about 50-75 basis points. The economy should be picking up,” CEA Subramanian.

GVA growth for the year was 6.6 per cent, also the slowest in three years and a tad lower than the second Advanced Estimate of 6.7 per cent. For the second half of the year, GVA growth, excluding agriculture and government spending, slowed down to 4.8 per cent, down from 7.6 per cent in the first half. Soumya Kanti Ghosh, chief economic advisor, State Bank of India, said the RBI would now have to take a look at the figures. He said the RBI had claimed the industrial sector had recovered in Q4, but the narrative had now changed.

Ghosh pointed out that manufacturing growth rose 10.7 per cent in Q1, but fell to 5.4 per cent in Q4. Subramanian said it was up to the RBI to cut interest rates but the economy could do well if all the macro support was provided.

The impact of demonetisation on investments was also evident in gross fixed capital formation (GFCF) — it fell by 2.1 per cent in Q4 FY17. Before the note ban, GCFC grew 3 per cent in Q2 and 7.4 per cent in Q1. Government expenditure, on the other hand, rose 31.9 per cent in Q4 FY17; in Q3, it was 21 per cent. In Q1 and Q2, it was about 16.5 per cent.

Private consumption expenditure, denoting demand, grew by 7.3 per cent in Q4, against 11.1 per cent in the previous quarter. The bump in the third quarter was because of significant purchases right old notes in some sectors. In Q2, it had risen 7.9 per cent, and in Q1, 8.4 per cent. Part of the reasons for the distinct slowdown in economic activities in Q4 could be explained by the price impact, as in nominal terms, GVA did expand by 11.3 per cent. In real terms, because of a higher GVA deflator (5.4 per cent), the real GVA growth slumped to 5.6 per cent in Q4.

Subramanian also said, “I think we can see some signs of bottoming out and a recovery in the nominal aggregates which, in fact, did pick up in the fourth quarter.” The figures released on Wednesday factored in the new series of the Index of Industrial Production (IIP) and the Wholesale Price Index (WPI).

It was expected the new series would boost GDP growth, but that did not happen. Quarterly figures, however, changed substantially. Earlier estimates had pegged Q1 manufacturing growth at 9 per cent.

Besides agriculture, mining also gave a boost to the economy in Q4. It rose 6.4 per cent in January-March against 1.9 per cent in Q3, despite price deflator for the mining sector expanding by a whopping 25 per cent.

Madan Savnavis, chief economist with CARE Ratings, said he expects the economy to grow 7.6-7.8 per cent in FY18.

“The growth estimate is contingent on the prediction of normal monsoon in this year, along with expectation of a boost in consumption demand, increased private sector and government spending, especially on infrastructure,” he said.

The nationwide roll-out of the goods and services tax in the second quarter of FY18 is also expected to spur growth, albeit marginally — an increment of 0.25 per cent to 0.5 per cent to GDP growth, Sabnavis added.