GDP growth slumps to threeyear low of 5.7%

‘MATTER OF CONCERN’ Demonetisation, preGST stress take toll, govt hopes for rebound

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 drawndown 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 yearon-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.

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Finance minister Arun Jaitley on Thursday indicated that the number of tax slabs under the goods and service tax (GST) regime could be reduced once the new indirect tax system that was launched on 1 July settles down.

Speaking at the India summit organised by The Economist in the capital, Jaitley said the GST Council which takes decisions on all indirect tax matters may consider the idea of collapsing the standard rates of 12% and 18% into one in due course.

“I do see a situation where, assuming tax compliance remaining high and the transition smooth, the GST Council, the first federal institution, which is sensitive to the challenges of time, can take the appropriate decision (on tax slabs) taking into account its impact on inflation,” the finance minister said.

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