Note ban impact: GDP growth dips to 7.1%

India loses fastest growing economy tag to China

The Indian economy hit a bump in 2016-2017, seeing the slowest growth in three years, at 7.1 per cent, after the government’s controversial decision to demonetise `500 and `1,000 currency notes. GDP growth in January-March 2017, the quarter just after demonetisation, fell to 6.1 per cent, well below market expectations, as the construction and manufacturing secrtors bore the burnt.

Due to slow growth in January-March, India lost its tag of fastest growing major economy to China, which grew by 6.9 per cent in 2017’s first three months.

This is bad news for the Narendra Modi government, that is celebrating three years in power, and is all set to roll out the landmark Goods and Services Tax from July 1, whose impact on economic activity in the first months is uncertain.

Chief economic adviser Arvind Subramanian said the demonetisation was a “temporary shock” that was “bottoming out”, and as remonetisation continues, “the economy should be picking up”.

The economy hit a bump in 2016-2017(April 1, 2016 to March 31, 2017) seeing slowest growth in three years at 7.1 per cent as the country took controversial decision to demonetise `500 and `1000 notes to tackle the problem of black money.

The GDP growth in January to March 2017 — quarter immediate after demonetisation announced on November 8 — fell to 6.1 per cent, well below market expectations as construction and manufacturing bore the burnt of note ban.

Due to slow growth in January-March period India has lost its tag of the fastest growing major economy to China, which grew by 6.9 percent in the first three months of 2017.

This is a bad news for the government which is celebrating three years in power and is set to roll out major tax overhaul GST from July 1 whose impact on economic activity in initial months is uncertain. GDP had

grown by 8 per cent in 2015-16, 7.5 per cent in 2014-15 and 6.4 per cent in 2013-14, according to new series. Opposition was quick to attack the government over poor GDP growth in the last quarter of FY17. “Even after creating a new series and playing with data, the GDP growth rate is mere 6.1 per cent (Q4 FY17) .... Internal security is in a mess, economy is slowing down, social fabric is being torn apart: government is celebrating three years of great governance,” tweeted CPM, general secretary, Sitaram Yechury.

GDP growth has displayed a downtrend over the quarters of 2016-2017, from 7.9 per cent in Q1 to 7.5 per cent in Q2 to 7 per cent in Q3 and further to 6.1 per cent in Q4.

“The distinct downtrend in GDP growth over the quarters of FY17 suggests that the slowdown in growth that had already set, was intensified by the note ban... The steady uptick in growth seen upto FY2016 has been interrupted in FY2017, despite the sharp turnaround in agriculture,” said Aditi Nayar, principal economist, Icra.

“FY17 was supported by the government consumption, without which real GDP growth would have fallen to 5.6 per cent, much lower than an average growth of 7.2 per cent in the previous four years,” said Nikhil Gupta, chief economist, Motilal Oswal Securities.

CEA Arvind Subramanian said demonetisation was a “temporary shock” to the economy and “we are seeing this bottoming out as remonetisation progresses”.

The projection for next year is certainly a pick up by about half a basis point. We said relative to this year it would pick up by about 50-75 basis points. I think I would stick with that projection for next year. The economy should be picking up — ARVIND SUBRAMANIAN Chief Economic Advisor