The impact of demonetisation on sectors such as construction and financial services, continued to slow down the gross domestic product (GDP) in the last quarter of FY 2017, making it the fourth consecutive quarter to see this.
The GDP slowed down from 7% in the third to 6.1% in the fourth quarter. This information was released by the government on 31st May. This lag in economic growth could pressurize the Reserve Bank of India (RBI) to cut policy rates in order to balance the need to encourage and incite growth with its inflation targeting focus. The monetary policy committee of the RBI meets next week, where it will decide these things.
Real gross value added (GVA), which is GDP minus the net taxes, also slowed down in the fourth quarter by 5.6%. However, the full year growth estimate for 2016-2017 made by the Central Statistics Office was fulfilled with 7.1% added to the 8% increase in the previous fiscal year.
The growth numbers for this financial year indicate the effects of demonetisation that have been felt since high-value banknotes were pulled out of circulation on November 9. The ensuing cash crunch and chaos in business, especially the unorganised sector resulted in financial services growing in single digits.
According to Aditi Nayar, a principal economist at ICRA Ltd., it appears that there was already a downward trend in the GDP growth over the quarters of 2017 and this became intensified when demonetisation hit the nation. She also added,
Demand and purchases during the festive season and a favourable base effect appear to have couched the impact of the note ban on consumption growth in Q3 FY17, which was followed by a sharp dip in Q4 FY17
The $2.3 trillion Indian economy, despite being the third largest in Asia is now lagging behind China’s 6.9% pace following the slow growth in Q4. This could result in India no longer being the world’s fastest growing major economy. In 2016-17, the country’s per capita income also slowed to 5.2% compared to last year’s 6.8%.
According to chief economic adviser Arvind Subramanian, the biggest impact of demonetisation was expected to be seen in the fourth quarter. He said,
We can see some signs of bottoming out on account of the remonetization, and recovery in the nominal aggregates which picked up in the fourth quarter shows that
While the construction sector shrank by 3.7% in Q4 compared to growth of 3.4% in Q3, the mining sector grew by 6.4%, public expenditure by 17% and financial services by 2.2%. The agriculture sector fell but maintained a healthy 5.2% while the manufacturing sector as well as trade, hotels, and transportation fell from Q3.
Excluding the agricultural and public expenditure showed a 3.8% growth in GVA in Q4, indicating a deep seated impact of demonetisation that the economic activity would have lagged more without a significant push in the public expenditure.
While private final consumption grew to 8.7% as compared to last year’s 6.1%, growth in gross fixed capital formation declined sharply from 6.5% last year to 2.4% in FY 17.
The World Bank expects the Indian economy to start growing now by 7.2% in the coming financial year and to touch 7.7% in FY 2020, a year later than what Moody’s Investors Services has predicted. Moody’s prediction takes into account that government has neutralized some of the negative impact of the demonetisation.
