GDP growth rate down to 5.7% in April-June, demonetisation pain lingers | business news | Hindustan Times
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GDP growth rate down to 5.7% in April-June, demonetisation pain lingers

The growth rate is the slowest pace at which the economy has expanded in three years, underlining the disruption caused by the roll out of the goods and services tax even as the economy struggles to recover from a shock demonetisation.

business Updated: Aug 31, 2017 22:15 IST
Suchetna Ray
Suchetna Ray
Hindustan Times, New Delhi
GDP,GDP growth,GDP slow down
A customer hands over cash to a merchant at a wholesale trading shop in Bengaluru. Indian shares ended higher on August 31, pulling back from losses earlier in the session, as investors awaited GDP data for the April-June quarter. (AFP File Photo)

India’s economy unexpectedly slowed to a three-year low in the April-June quarter, signalling that business was still hurting from last year’s shock cash squeeze as well as disruptions ahead of the rollout of a new tax regime.

Gross Domestic Product (GDP) grew 5.7% in the last quarter, undershooting market expectations, compared to 6.1% in January-March period. The drop was even sharper when compared to the like-quarter a year ago when GDP expanded at 7.9%, official data released on Thursday showed.

The slowdown suggested the underlying momentum in the economy was still weak, posing a challenge to Prime Minister Narendra Modi’s government that must produce masses of jobs to absorb a million people entering the workforce every month.

“Certainly a matter of concern that first quarter GDP has come down to 5.7% and it’s obvious therefore that it throws up challenge for the economy,” Finance minister Arun Jaitley said.

The economy lost steam primarily because of a sharp fall in mining, manufacturing and construction sectors, where demand remained muted even nine months after the government decided to scrap about 86% of cash in circulation to fight corruption and counterfeiting.

A rush to clear large inventories ahead of the Goods and Services Tax (GST) rollout also affected manufacturing, Jaitley said, adding that the drawn-down in stocks is complete so the dip in the sector could be bottoming out. The April-June data, however, does not take into account the impact of the new tax regime launched on July 1.

While manufacturing and construction grew at just 1.2% and 2% respectively, mining output saw a 0.7% contraction year-on-year. This offset relatively robust expansion in services and a moderate growth in farm output.

“The lingering impact of demonetisation is visible in the low growth of construction,” Aditi Nayar, an economist with ICRA, told Reuters, referring to a segment of the economy where most people use cash.

In November, Prime Minister Modi unexpectedly demonetised 500-and, 1000-rupee notes in what was billed as the country’s biggest-ever assault on ‘black money’. But the move hobbled the economy with a severe cash crunch, hurting demand, capital spending and lending by debt-laden banks.

Thursday’s economic data came a day after the Reserve Bank of India (RBI) said all but 1% of the demonetised banknotes had been returned to the banking system, putting a question on the efficacy of the November 8 shock decision. The government had hoped to flush out at least Rs3-lakh crore of so-called black money.

The Gross Value Added, a more appropriate measure of economic expansion that leaves out indirect taxes and subsidies, remained flat at 5.6% over the past quarter but significantly lower than the 7.6% a year ago.

The GDP data also came the same day the government said its fiscal deficit at July-end touched 92.4% of the budget mainly because of front-loading of state expenditure. This is also a sign that government spending was buoying up an economy where private investment was scarce. The deficit figure for the same period of 2016-17 was 73.7% of the target.

Gross fixed capital formation (GFCF), a measure of private investment in the economy, grew 1.16% during the quarter compared to 7.39% in the same period in 2016.

Thursday’s disappointing figures are prompting economists to review downward their full-year growth estimates.

“The numbers seem to suggest that the slowdown from last the quarter has intensified due to the combination of long-term slowdown and temporary shock factors like demonetisation and GST,” said Abheek Barua, chief economist with HDFC in New Delhi.

“We have to revise our GDP outlook numbers for the full year.”

(With agency inputs)

First Published: Aug 31, 2017 17:42 IST