Note ban impact: GDP growth slips to 7% in 3rd quarter

Andrew Cummings
March 1, 2017

In the report titled "Modest Acceleration in the Global Economy, but Shifting US Policies Inject Uncertainty", Moody's said there is a high risk of a significant protectionist shift in US trade policy and could inflict lasting damage to the global economy.

The Commerce Department says that the gross domestic product, the broadest measure of economic health, increased at an annual rate of 1.9 percent in the October-December quarter.

The data, put out by the Central Statistics Office (CSO), also projected that the economy will likely to grow at 7.1 percent in 2016-17, 0.8 percentage points slower than the previous year's 7.9 percent expansion, mirroring demonetisation's effect on household spending and corporate investment.

Given that nominal GDP growth has been projected at 11.5% for 2016-17, compared with 10% in the last fiscal, it may offer more leeway to the government to improve spending in the next fiscal and yet contain fiscal deficit, which is expressed as a ratio of the nominal GDP, at the targeted 3.2%. Hiring and consumer spending appear relatively brisk so far in 2017, but the overall economy is tracking at a 2% growth rate in the first quarter of the year, according to forecasting firm Macroeconomic Advisers. It recently upgraded the country's GDP growth for the previous fiscal year from an earlier estimate of 7.6%. "We maintained 7 per cent growth". While GDP growth for the quarter was not as slow as estimated, it decelerated from the 7.4 per cent recorded during the July-September quarter.

Economists surveyed by The Wall Street Journal had expected an upward revision to a 2.1% growth rate. Similarly, mining and quarrying is now expected to expand at 1.3% in 2016-17, instead of the January prediction of a contraction of 1.8%.

Meanwhile, ratings agency Icra indicated that government estimates for GDP rely heavily on available data from the formal sector.

Despite the November cash ban, consumer goods companies raised prices in categories such as fast-moving consumer goods (FMCG), liquor, automobiles and dairy during the December quarter and beyond, suggesting good demand trend and the fact that they considered any demand slump after demonetisation to be temporary.

During first two quarters of FY16, the GDP estimates were at 7.8% (Q1FY16), 8.4% (Q2FY16) compared to its provisional of 7.5% (Q1FY16) and 7.6% (Q2FY16). That matched 2011 as the slowest usa full-year growth since the end of the recession.

The first growth rate projection for FY2017 was 7 to 7.75 percent.

Commenting on the data, Economic Affairs Secretary Shaktikanta Das said this year growth figures are on a high base of last fiscal and numbers "do not show much negative impact of demonetisation".

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