GDP data for April-June: A disappointing growth story

The effect of demonetisation continues to linger, especially on industry and consumption

India’s GDP growth slowed to 5.7 per cent in the April-June quarter of 2017-18, against 7.9 per cent in the same quarter of 2016-17 and 6.1 per cent in the previous quarter, showed data released by the Central Statistics Office on August 31. The gross domestic product (GDP) growth number for April-June quarter of FY18 comes in as a disappointment, with a low of 5.7% being recorded against expectations of growth in the region of 6.5%. There were few expectations of growth in this quarter matching that for FY17 which was 7.1%. Curiously, some of the key reforms that have been implemented by the government in the last 9 months or so have left their shadows on this performance.

 
First, the effect of demonetization continues to linger especially on industry and consumption.  Corporate results for Q1 were not satisfactory and if one includes the unorganized sector comprising SMEs, the picture darkens further.
 
Second, the introduction of RERA, though a very good move, has impacted the real estate sector to an extent as it has come in the way of new projects, which is reflected in the growth in construction number of 2%. 
 

Third, the GST which is necessary for fostering efficiency in the economy has led to considerable destocking in manufacturing in June which in turn has brought down the growth rate to a low of 1.2%. On the positive side it can be said that these disruptions may be considered as being temporary which will be corrected along the way.

 
Will the performance be better in the coming months? Probably yes as some of these negative forces should get reversed. First, production should increase in all the industries which went in for destocking as they have to regain their old inventory levels to meet future demand. Second, consumption spending should increase with the festival cum harvest season on the anvil. However, rural spending would need to be monitored as the latest data on area sown for rice, coarse grains, oilseeds and pulses is lower than last year which could lead to moderation in growth in production.
 
Third, investment in infra should pick up, albeit gradually as the monsoon recedes and roads and urban development projects pick up. Fourth, the government should also play its role in terms of spending on capital projects though there will be a slowdown as there has been some frontloading of expenditure in the first 4 months of the year. The limit of around Rs 3.3 lkh crore budgeted for the year cannot be exceeded unless it is willing to cross the fiscal deficit target.

 
Therefore, growth may be expected to pick up and cross the 7% mark in the coming months. However it looks very unlikely that growth would come close to the FY16 number of 8% and it would take some effort to cross or even reach the FY17 growth rate of 7.1%.
 
An issue which still remains a concern in the economy for which there are no easy solutions presently is capital formation. The gross fixed capital formation rate has moved down to 27.5% from 29.2% which means that companies are not investing. Here, not only consumption needs to revive to push up capacity utilization rates to ensure that fresh investment takes place but we also need to resolve the NPA issue with banks as presently they do not have the wherewithal to support such investment.

 
FY18 is a critical year for the economy as it involves reconciliation with some major reform measures taken which will be vindicated by the final numbers. also there needs to be acceleration so that more jobs are created, which is essential in the current context where employment is a challenge. The author is chief Economist, CARE Ratings