Monetary policy review: More downside risks for GVA growth

The Reserve Bank of India (RBI)’s bi-monthly monetary policy unfolded few disappointments. Apart from keeping the rates on hold, the apex bank also reduced its FY17 gross value added or GVA growth estimate for the second time in a row. In December last year, RBI had brought down this metric by 50 basis points from 7.6 per cent to 7.1 per cent while stating that demonetisation had contributed about 15 basis points to this downgrade. On Wednesday, it revised the GVA growth number by another 20 basis points to 6.9 per cent. While RBI did not specify how much of this downgrade is on account of demonetisation, experts believe there are further downside risks even to this revised forecast.

Sonal Verma, India economist, Nomura, says, “We believe RBI’s revised GVA estimate is still on the optimistic side and there are more downside risks to the 6.9 per cent estimate. Impact on services on supply side and consumption on the demand side are the key pressure points on economic growth. We peg FY17 GVA growth at 6.5 per cent.”

Madan Sabnavis, chief economist at CARE Ratings, seconds this view. “The effect of demonetisation was not fully known earlier in December, and the lowering is premised on the assumption that several sectors have been impacted by this move. We believe there are more downside risks to RBI’s GVA estimates and peg it at 6.5-6.6 per cent for this financial year,” he says.

Continued pressure on consumption demand, stagnant private investment and low employment levels are key pressure points on economic growth. Impact on services in the supply side is another sore point. “While things are looking up in terms of the currency situation, we need to see spending pick up, which may not do so in the next two months. In particular auto, consumer goods, real estate and housing will take time to pick up,” Sabnavis said.

A key worry of most economists is that as against demonetisation, which is likely to be a transient or short-term dampener, there seems to be more headwinds for GVA growth.

“Even without demonetisation, GVA growth would have been 7-7.25 per cent in FY17, which is much lower than 7.8 per cent, according to revised data for FY16. This is actually more concerning because in absence of demonetisation why should there be a slowdown. We believe GVA growth could be 6.7 per cent in FY17,” says Nikhil Gupta, lead economist, Motilal Oswal Institutional Research.

It is important to note here that the impact of the note ban will come in with a lag. This is because the unorganised sector has been more hit than the organised sector from this exercise. Initial estimates of economic growth are always on the official data or data for the organised sector. The data for the unorganised sector gets incorporated when new surveys are taken out. “The next survey will happen in FY18, which will be published in FY19, so at least after two years, new data on unorganised sector will be available,” adds Gupta.

This means impact of demonetisation will be understated in the initial GVA estimates. Overall, while pressures persist on growth in FY17, a few experts, though, believe normalisation of consumption demand could lead to some improvement in GVA growth in the next financial year. Devendra Pant, chief economist at India Ratings, says, “GVA growth is likely to go up from 6.9 per cent in FY18 as the pent-up consumption demand comes on board."