GDP growth to slow to 7.1% in FY17

• According to CSO(Central Statistical Office), India’s economic growth is likely to decelerate to 7.1% in 2016-17 from 7.6% the previous year, chiefly due to an industrial slowdown.
• The growth projection by the Central Statistics Office (CSO) was released a month before it is due to help the government prepare the budget, whose presentation has also been advanced by a month to 1 February.

Highlights:

• Financial services sector, which is estimated to grow by 9%, compared with 10.3% last year, growth in bank deposits and credit data for November had not been factored in on account of the demonetisation drive. There was a high degree of volatility in these figures, so a conscious decision was taken not to include them.
• GDP at market prices (now $2.2 trillion) grew 11.9% in 2016-17, higher than the 11% assumption in the current year’s budget. This will make the task of achieving the fiscal deficit target of 3.5% of GDP in 2016-17 that much easier for the government.
• Buoyed by a normal monsoon and encouraging sowing data, the farm sector’s growth is projected to accelerate to 4.1% this financial year from 1.2% last year.
• However, slower growth in manufacturing (7.4%) and the construction sector (2.9%) and contraction in the mining sector (–1.8%) is expected to drive down overall growth.
• Among the services sectors, public expenditure, which has been the key driver of growth this year, is expected to grow 12.8% compared with 6.6% last year. Growth in the trade, hotels and transport sector—the largest services segment—is expected to slow to 6% from 9%.
• While private consumption is expected to continue to decelerate (6.5%), investment demand is set to enter negative territory (-0.2%), signalling the dire state of private investment demand.
• Another measure of economic activity—gross value added (GVA)—showed the economy growing 7% in 2016-17, compared with 7.2% last year.
• A lower GVA means the government’s subsidies were lower than its indirect tax collections.
• The government has advanced the presentation of the budget to speed up investment expenditure in the productive pre-monsoon months.

Analysis:

• The currency crunch that followed the demonetisation of high-value notes was widely believed to have hit consumption, as well as jobs in the informal sector, driving down economic growth.
• Performance of the economy will certainly be weaker in the second half (October-March) of the financial year. The projection for the full year is not based on sufficient information, which may lead to a downward revision in coming days.
• But According to domestic rating agency ICRA, The advance estimate of 7.1 per cent GDP released by Central Statistical Organisation (CSO), will have major errors as it does not include the data for the months after demonetisation.
• Given the impact of demonetisation on actual activity from mid-November 2016 onward, projecting GDP growth for the full year by extrapolating the trends up to October 2016 for several sectors, may introduce more errors than in earlier years. This would be particularly apt for cash intensive sectors such as construction.

By: Vishal