Demonetisation to yank down Q2 growth by 40 bps to 7.2%: Icra

Citing debilitating impact of the demonetisation drive on the economy, domestic rating agency Icra on Monday forecast a 40 bps dip in growth rates to 7.2% in the second quarter of the current fiscal.

"We expect gross value added (GVA) growth at basic prices to print at 7.2% in Q2, lower than 7.6% projected earlier and also mildly lower than the year-ago period, due to demonetisation.

"Accordingly, we have also revised downward our forecasts for GDP and GVA in 2016-17 by 40 bps each to 7.5% and 7.3%, respectively," Icra senior economist Aditi Nayar said in a note.

She further said the expected boost to agriculture and allied activities from the near-normal monsoons will be neutralised by a decline in the growth of industry and services in Q2.

Accordingly, the pace of expansion of GVA at basic prices is expected to ease mildly to 7.2% in Q2 from 7.3% each in Q2 of 2015-16 and Q1 of 2016-17.

"Based on our current assessment of the likely impact of demonetisation, we expect full year GDP and GVA to be 40 bps lower than our earlier forecasts of 7.9% and 7.7%, respectively, which presumes that economic activity would resume normalcy in Q4 of 2016-17.

"Consumption-oriented sectors, particularly those involving large cash transactions, such as real estate, construction, jewellery, retail, travel and tourism and trade are likely to experience a lull in the short-term. Cash-based transactions in the unorganised sector would also get disrupted, particularly in rural areas," she added.

Nayar, however, said farm, forestry and fishing growth will improve considerably to 5% in Q2 from 2% a year ago as the first advance estimates for crop production have forecast a significantly higher growth in kharif output in 2016 for coarse cereals, pulses, oilseeds and cotton, relative to the increase in their sown area.

The kharif harvest, which largely took place in October, is also likely to support agricultural growth in the early part of Q3, she said.

Icra expects industrial growth to ease to 5.5% in Q2 from 6.3% a year ago, led by the manufacturing, mining and electricity sub-sectors.

The GVA growth for the manufacturing sector has been significantly higher than the volume growth revealed by the IIP for several quarters, partly led by the decline in input costs for corporates in some sectors, reflecting lower commodity prices, she noted.

"Q2 corporate earnings suggest that net income growth continues to outpace revenue. Nevertheless, given the lagged effect of a rise in commodity prices amid modest demand and an unfavourable base effect, real manufacturing GVA growth to decline to 7% in Q2 from 9.2%" Nayar said.

A similar downward spiral is expected in services as well which is likely to ease to 8.7% in Q2 from 9%, due to moderation in railways' freight revenue, petrol and diesel intake and contraction in services exports.

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