India's GDP growth likely to slip below 7% in FY18: DBS report

According to DBS, demonetisation in Nov 2016 & GST rollout in July 2017 had short term impact on economic activity

India's GDP growth is likely to face near-term headwinds and might slip below 7 per cent mark to a three-year low this financial year, says a DBS report.

According to the global financial services major, two recent policy measures — demonetisation in November 2016 and GST rollout in July 2017 had a short term impact on economic activity and aggravated the already slowing momentum.

"These amplified the already weak trends in manufacturing and investment growth slowing first half growth to 5.9 per cent from 7.9 per cent in 2016," DBS said.

"For 2017-18, a weak June quarter and the likelihood of only a modest improvement in July-September, prompts us to temper our full year expectations. We expect real GDP to average 6.8 per cent year-on-year in 2017-18 (as against 7.3 previously)," DBS said in a research note.

India's economic growth slipped to a three-year low of 5.7 per cent in April-June, underscoring the disruptions caused by uncertainty related to the GST rollout amid the slowdown in manufacturing activities.

"Recovery is likely to be gradual, but below potential this year and the next, with the resultant output gap keeping price pressures under check. Until the private sector returns, government spending towards capex and infrastructure will be crucial to take growth back above 7 per cent," DBS said.

Noteban curtailed cash availability, slowing consumption and hurting cash sensitive sectors like construction, trade, logistics, and small and medium size enterprise.

Moreover, weak demand and excess capacity weighed on manufacturing output in early 2017, followed by destocking by retailers and wholesalers ahead of GST implementation.

The report further said the second half of this financial year is expected to witness an improvement in trend growth as the impact of demonetisation is gradually fading, with the fallout from GST likely to extend to extend to the September quarter before fading out.