Demonitisation, pre-GST destocking reasons for drop in Q1 GDP

The Q1 GDP growth data which will be announced today will be an important factor for RBI in deciding whether to cut interest rates further

Thursday's data by the Central Statistics Office (CSO) showed that India's "real" or inflation-adjusted GDP grew at its slowest pace in 13 quarters and is still a long way off from returning to an 8 percent growth path, last seen in 2015-16.

Anant pointed out that the gross value added (GVA) in April-June quarter (5.6 per cent) was much less than in the same period previous year (7.6 per cent). What helped boost growth was spending by government which accounted for one-third of GDP growth in this quarter and reflected in the government's fiscal deficit in the April to July period which is now over 92 per cent of the Rs 5.46 lakh crore estimated for FY 18.

The drop in growth was even sharper compared to the like quarter a year ago when the country's GDP grew at 7.9 per cent.

The Indian economy has slowed down further compared with the preceding quarter when it had posted a 6.1 per cent growth rate.

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Remarking that the growth numbers for both GDP and GVA had "undershot" her expectations, rating agency ICRA's principal economist Aditi Nayar said this was "a thirteen-quarter low in GDP growth" and structural factors such as higher commodity prices, the onset of GST and the lingering effects of demonetisation could be major contributors. "... With GST now being operationalised, this would be bottoming out as far manufacturing is concerned and probably the curve could turn up", the minister told reporters here.

There was a marginal decline in the growth of agriculture, forestry and fishing at 2.3% against 2.5% growth last year, whereas growth in electricity, gas, water supply and other utility services came down to 7% against 10.3% growth last year.

Meanwhile on the production side, the manufacturing sector saw its weakest growth in nearly two years. "Its performance has been poor, though the sales growth is good", he said.

"According to me, it is partly because of demonetization and partly because it was the last quarter before GST was implemented". This was the lowest quarterly GDP growth recorded in the three years of the Narendra Modi government.

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Those hopes, however, have been belied as merchandise exports growth has slumped to 3.9 percent year-on-year from near 28 percent growth in March.

Capital investment also rebounded from a 2.1 percent contraction in the March quarter. In its annual report, RBI said that nearly 99% of the notes that were banned by the government previous year found their way back in the system in the form of deposits.

Nirmal Bang in its report said, "We expect a strong pick-up in activity in 2HFY18 as the shocks of demonetisation and GST fade away slowly". Crisil has noted that the government has also revised down GVA growth for the fourth quarter of last fiscal by 50 basis points to 5.6 percent, suggesting that the impact of demonetisation on the economy was more than earlier estimated.

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