GDP outcome - A vindication of currency purge? Business Standard 1st March 2017

The major takeaway from the gross domestic product (GDP) numbers that has been released is that the demonetisation impact on growth has been extremely muted, with minimum impact on various sectors. The third quarter was to reflect any shortfall in output on account of this move, and the picture is hence, satisfying with growth at seven per cent. The two sectors that have been impacted were construction and the financial segment, where growth rates were low with growth of 2.7 per cent and 3.1 per cent, respectively. As was expected, the real estate sector was affected the most, on account of the non-availability of cash, which gets reflected here.

The government has been very active in this quarter to ensure that growth has been on the right path with this segment showing growth of 11.9 per cent, which is in line with the higher infra spending by the government, as revealed in the Revised Estimates for the year in the Budget that was presented. The surprise elements have been high growth in gross value added in manufacturing, which has always been an enigma, considering there is a disconnect between Index of Industrial Production growth and this number, which is actually value added in the corporate sector, which has been buoyant based on the third quarter (Q3) results announced so far. Hence, the Q3 growth number is a vindication of the government’s stance that demonetisation would not affect growth significantly.

For this year too, the Central Statistics Office (CSO) is looking at 7.1 per cent growth, which though lower than 7.9 per cent of last year, is still fairly impressive and comes well over the other private forecasts. The sectoral break-up shows that the good performance is being driven by the government, agriculture and manufacturing. It does appear that compared with the beginning of the year where growth estimates at the official level were in the range of 7.5-8 per cent, we would have lost around half a percentage point in growth in GDP, which could be attributable to demonetisation.

The picture on capital formation remains disappointing and the CSO does not expect there will be any improvement this year, with the gross capital formation rate coming down from 29.2 per cent in FY16 to 26.9 per cent in FY17. Private investment is the clue to a reversal here, as the government does have some limitation in driving capital formation, given that the central government capex is just about two per cent of GDP at current prices and would not be able to drive the economy in the absence of private investment.

The way forward is positive because there are already signs that the volume of currency in the system is picking up, which means economic activity will mean revert with a hiatus of not more than two quarters i.e., July 2017 onwards. A growth rate of above 7.5 per cent for FY18 cannot be ruled out, if inflation remains under control. Also, such a growth rate will support the projections made in the Union Budget and the revenue targets would be easier to meet.  But in order to ensure that jobs are created, the focus has to be on ensuring that physical production, especially in industry, keeps pace with the growth in value addition. This will probably be the focus of attention in the coming year for the government.