Economic growth plunged to 5.7 per cent in April-June of the current financial year (FY18), the lowest in the three-year rule of the Modi government due to demonetisation and destocking by companies following pre-goods and services tax (GST) jitters.
With this, India lagged China in terms of growth in gross domestic product (GDP) for the second consecutive quarter. The Chinese economy expanded 6.9 per cent in each quarter.
Gross value-added (GVA) grew by 5.6 per cent in April-June, the same rate as in January-March, according to the data released by the Central Statistics Office.
GDP growth is down from 7.9 per cent in April-June 2016-17 and 7.5 per cent in the second quarter of that year. GVA grew 7.6 per cent and 6.8 per cent in the first and second quarters of 2016-17.
Growth in manufacturing declined to 1.2 per cent in April-June, from 5.3 per cent in January-March. Mining and quarrying contracted 0.7 per cent during the quarter, after growing 6.4 per cent in the previous quarter.
Finance Minister Arun Jaitley expressed the hope that the economy would grow at 7 per cent in FY18, a prospect that few economists expect to see happen. Economic Affairs Secretary Subhash Chandra Garg said growth was expected to improve in the next few quarters.
Electricity and related sectors grew 7 per cent, against 6.1 per cent; and trade, hotels, communication grew by 11.1 per cent, against 6.5 per cent.
Construction growth was up 2 per cent, against a contraction of 3.7 per cent, even as the real estate sector remained in a slump, and the monsoon arrived on time in June. Financial, real estate and professional services grew 6.4 per cent, against 2.2 per cent, but the real estate part did poorly.
Chief Statistician T C A Anant attributed this to structural, including regulatory, issues. Construction growth was essentially due to an infrastructure boost provided by the government. Agriculture growth lost pace at 2.3 per cent, against 5.2 per cent in the previous quarter, and 6.9 per cent in October-December of 2016-17. This was despite crop production growing, even as livestock could not keep pace. Former chief statistician Pronab Sen attributed this to a ban on trade of cattle for slaughter.Growth in public administration also slowed to 9.5 per cent, from 17 per cent.
Gross fixed capital formation was up 1.6 per cent, against a fall of 2.1 per cent in the previous quarter. The growth rate was the same as in October-December 2016, the period of demonetisation. Even then, investment is yet to revive to the growth rate of 3 per cent in the second quarter of 2016-17 and 7.4 per cent in the first quarter of that year.
Public final consumption expenditure expanded at a slower rate of 6.6 per cent during April-June, against 7.3 per cent in January March.
Anant attributed the slowdown to high prices of intermediate goods. Another key reason was the high de-accumulation of inventory during the first quarter, he added.
“The numbers seem to suggest that the slowdown has intensified due to the combination of a long-term slowdown and temporary shocks like demonetisation and GST destocking,” said Abheek Barua, chief economist of HDFC Bank. Anjali Verma, economist, PhillipCapital India, however, said the effects of demonetisation had faded. ”The next quarter’s impact will be that of the GST. It will be a one-quarter phenomenon. In the medium to long term, it is expected to be positive,” she added. “Our full-year GVA growth estimate of 6.8 per cent needs to be revisited,” said Radhika Rao, India economist, DBS Bank.
State Bank of India Group Chief Economist Soumya Kanti Ghosh expected GDP to grow sub-6.5 per cent in 2017-18, less than even the lower range of the Economic Survey. In its Volume 1, the Survey had projected the economy to grow 6.75-7.5 per cent, but Volume 2 had said that touching the upper end is very difficult.