IN an indication that demonetisation may have hit the economy hard, Gross Domestic Product (GDP) in the January-March quarter grew at the slowest pace in at least four quarters at 6.1 per cent as against a 7.0 per cent growth in October-December, data released by Central Statistics Office (CSO) on Wednesday showed. For the 2016-17 financial year, however, the GDP growth rate was kept unchanged at 7.1 per cent, despite expectations that the revision of GDP in line with the new series of the Wholesale Price Index and the Index of Industrial Production (IIP) would yield a higher growth rate of around 7.6 per cent.
The construction sector reflected a sharp contraction while financial services sector grew at single-digit pace during the fourth quarter. The unchanged 7.1 per cent growth for the last financial year has come on the back of a significant upward revision in growth for April-June quarter, with GDP growing at 7.9 per cent in the revised series as against 7.2 per cent Jan-March growth slows down to just above 6% growth estimated earlier.
As per the new series, while GDP growth was recorded at 7.5 per cent in July-September compared with earlier estimate of 7.4 per cent, it was unchanged at 7.0 per cent for October-December quarter.
Gross Value Added (GVA) growth, which is GDP minus net taxes and serves as a more closely watched estimate for quarterly growth, also fell sharply to 5.6 per cent in January-March from 8.7 per cent last year and 6.7 per cent in October-December. The GVA growth of 5.6 per cent for January-March is the lowest in at least eight quarters. More details pertaining to quarterly GDP and GVA data for previous years will be released on Thursday, CSO officials said. For 2016-17, the GVA fell sharply to 6.6 per cent from 7.9 per cent growth in 2015-16.
Chief Statistician T C A Anant said that the impact of demonetisation on GDP needs to studied in detail. “Analysis of policies like demonetisation cannot be done through simple post hoc ergo propter hoc. Because it is after this, so it is because of this…impact analysis of a policy is an extremely sophisticated field in econometrics. I would caution against reading a single number which comes after an event as being reflective of the consequences of the event,” he said.
When asked whether demonetisation is one of the elements impacting GDP, he said, “of course, certainly one of them. Every policy decision impacts the numbers, so has this impacted the number.” Economists had expected the revised methodologies of WPI and IIP to have a big beneficial impact on economic growth data — both real GVA and real GDP growth. The exclusion of indirect taxes from the WPI was expected to add to the real value of GDP as the WPI-linked deflator for national accounts would now be lower.
The GDP, as per the new series with base year of 2011-12, had grown by 8 per cent in 2015-16 as against 7.9 per cent growth based on the old series.
As per sectoral growth, manufacturing growth declined to 5.3 per cent in January-March from 8.2 per cent in the previous quarter and 12.7 per cent growth in the same period last year. Construction sector recorded a contraction in January-March, with GVA growth at (-)3.7 per cent as against 3.4 per cent growth in previous quarter and 6.0 per cent growth last year. Agricultural growth also slipped to 5.2 per cent in January-March from 6.9 per cent in the previous quarter but was higher than 1.5 per cent growth seen last year.
For the overall 2016-17, agricultural growth jumped to 4.9 per cent from 0.7 per cent last year while manufacturing growth was recorded at 7.9 per cent, lower than 10.8 per cent last year. The mining sector’s growth fell sharply to 1.8 per cent in 2016-17 from 10.5 per cent last year, while construction sector’s growth was recorded at 1.7 per cent as against 5.0 per cent last year.
Gross Fixed Capital Formation, which is a proxy for private investment, also fell to 28.5 per cent in January-March from 29.5 per cent in previous quarter and 30.8 per cent in the same period last year. Private Final Consumption Expenditure, an indicator for household consumption expenditure, declined to 57.3 per cent in January-March from 58.6 per cent in October-December, but was higher than 56.6 per cent last year. Government Final Consumption Expenditure also slowed to 9.4 per cent in the fourth quarter from double-digit growth shown in previous three quarters.
“The sharp slowdown in Q4FY16-17 continues to reiterate the fact that demonetization has taken a toll on FY17 growth, and this conforms with the already tepid high frequency data…going ahead, we expect the consumption led story to continue and it will remain the key catalyst of growth…however, lower budgeted growth in the general government spending, a key contributor to growth, compared to FY17 along with complete absence of private investment is expected to continue to drag on overall growth,” Kotak Mahindra Bank’s Senior Economist Upasna Bhardwaj said.
On May 12, with an aim to bring major macroeconomic indicators of IIP and WPI in line with national accounts, the government changed its base year to 2011-12. IIP growth based on the new methodology has been higher than the growth based on the old base year. For 2016-17, IIP growth averaged 5.0 per cent in the new series as against a mere 0.7 per cent in the old base series.
The new WPI series does not include any indirect taxes, which brings it conceptually closer to the producer prices and also removes fiscal impulse impact. The new methodology has led to consistently lower WPI inflation than earlier series. For 2016-17, the WPI inflation averaged a mere 1.7 per cent in the new series as against 3.7 per cent growth in the old base series.