Estimate of economic growth in Q4 reveals downside surprise

The data on gross domestic product (GDP) and gross value added (GVA) for FY17 (financial year 2016-17) released by the Central Statistics Office has presented some surprises. 

Contrary to our anticipation that the gradual remonetisation would result in a sequential uptick in growth in fourth quarter (Q4) of FY17, GVA growth has recorded a broad-based and considerable decline to 5.6 per cent in Q4FY17 from the revised 6.7 per cent in third quarter (Q3) of FY17. The only sub-sectors defying this trend are mining and quarrying, public administration, defence and other services, which are dominated by government spending. 

The slowdown in GVA growth in Q4FY17 partly reflects an unfavourable base effect, given the uptick in expansion to a robust 8.7 per cent in Q4FY16 (financial year 2015-16) from 7.3 per cent in Q3FY16. Additionally, the lingering impact of the note ban weighed upon the performance of some sectors, especially construction, which is estimated to have contracted by 3.7 per cent in Q4FY17. Unsurprisingly, agricultural growth moderated in Q4FY17 after the healthy performance in Q3FY17 that had benefited from the record high kharif harvest for most crops.

Moreover, GDP growth has displayed a slowdown over the quarters of FY17, from 7.9 per cent in (first quarter) Q1 of FY17 and 7.5 per cent in second quarter (Q2) of FY17 to 7.0 per cent in Q3FY17 and further to 6.1 per cent in Q4FY17. This distinct downtrend in GDP growth over the course of FY17 suggests that the slowdown in growth that had already set in during Q2FY17 was intensified after the note ban. 

Interestingly, growth of private final consumption expenditure declined sharply to 7.3 per cent in Q4FY17 from the robust 11.1 per cent in Q3FY17. It appears that a favourable base effect as well as purchases made during the festive season couched the impact of the note ban on consumption growth in Q3FY17. Moreover, the year-on-year growth in gross fixed capital formation recorded a sharp deterioration over the course of FY17, culminating in a 2.1 per cent  contraction in Q4FY17, which only serves to reinforce the perception of a lull in investment activity. However, the high 31.9 per cent expansion in government final consumption expenditure in Q4FY17, bolstered GDP growth from an even sharper slowdown.

Although GDP and GVA growth in Q4FY17 have surprised on the downside, we continue to expect the Monetary Policy Committee of the Reserve Bank of India to keep the repo rate unchanged in the June 2017 policy review. Nevertheless, the tone of the policy statement is expected to be far less hawkish than the April 2017 statement, hinting at the possibility of one more rate cut later in this  fiscal year.  

Icra expects growth in FY18 (financial year 2017-18) to remain domestic consumption driven, with a muted rise in export volumes, moderate uptick in aggregate government consumption and investment spending, and a back-ended pick-up in private sector investment, after businesses have successfully navigated the transition to the goods and services tax. We expect the uptick in growth in FY18 relative to FY17 to be moderate at 30-40 basis points (bps) for GVA at basic prices, and limited to 10 bps for headline GDP. 

The author is managing director and Group CEO, Icra. The views expressed are personal