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India's demonetization "pain" coupled with GST "anxiety" back to the fore following 5.7% GDP growth: Crisil

Nuances of GDP-1
By Our Representative
Following one of the lowest Gross Domestic Product (GDP) growth rates in recent years, 5.7%, in the second quarter of the financial year 2017-18, India’s top rating agency, Crisil, has said that this has brought “demonetisation pain” and goods and services tax (GST) “anxiety” again the fore.
Based on data from the Central Statistical Office (CSO), Government of India, released on Thursday, Crisil says, “Crucially, the government has also revised down gross value added (GVA) growth for the fourth quarter of last fiscal by 50 basis points (bps) to 5.6%, suggesting that the impact of demonetisation on the economy was more than earlier estimated.”
Carried out by chief economic Darmakirti Joshi and economist Adhish Verma, the analysis said, the “slid to 5.7%” in the last quarter “from 6.1% in the same quarter last fiscal” suggests “slowdown”, which is corroborated “with corporate results for the first quarter, which had shown net profits declining for chunk of listed firms.”
The experts add, “The computation of GDP relies heavily on corporate data from the Ministry of Corporate Affairs database. The slowdown reflects sharp deceleration in exports of goods, and some moderation inconsumption growth.”
Nuances in GDP-2
According to Crisil, GVA growth, or the supply-side GDP, which is supposed to be a “truer estimate of underlying economic activity as it doesn't take into account the impact of taxes and subsidies, grew 5.6% in the first quarter, same as in the fourth quarter of last fiscal, but down from 7.9% on-year.”
“The fact that GVA growth in the first quarter was the same as in the fourth quarter suggests waning demonetisation impact was offset by rising anxiety over the GST”, it adds.
“Industrial growth in the first quarter was down to 1.6% compared with 3.1% in the previous quarter, on account of a sharp slowdown in manufacturing growth (1.2% vs 5.3%) and de-growth in mining (-0.7% vs 6.4%)”, the top rating agency says.
The slowdown in industrial growth, says Crisil, was “arguably on account of GST uncertainty, which lead to destocking by retailers and slowdown in the production process.”
The experts further say, “Agricultural growth in real terms, too, slowed to 2.3% from 5.2% in the fourth quarter. Here, it is important to note that despite real growth of 2.3%, nominal agricultural growth was only 0.3%, suggesting that while agricultural output grew, their prices fell.” Real growth is derived by stripping the price impact from nominal growth.
Uptick in investment: "Bodes will for future growth"
Pointing out that it is only the services sector which “anchored overall GVA growth, rising 8.7% from 7.2% on-year”, Crisil says, this was “driven by improvement in two sectors -- trade, hotels, transport and communication, and financial, real estate and professional services.”
Pointing out that “there was mild improvement in investment growth (to 1.6% vs 2.1%, on-year, which pulled up the share of fixed investments to 29.8% from 28.5%”, and this “may be reflective of optimism in the growth recovery in the second half”, Crisil, however, says, “Outlook In an environment of subdued global growth and week investments, India’s GDP cannot grow fast in the short run.”
Hence, Crisil says, it has decided revise its GDP growth forecast down from 7.4% stated earlier for the fiscal 2017-18, though adding, “That said, normal monsoon, softer interest rates and inflation, and pent-up demand (demand postponed due to the demonetisation) will support consumption growth in the remaining quarters.”

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