Eco­nomic growth falls more than ex­pected to 5.7% in Q1

Fi­nance min­is­ter Arun Jait­ley says gross do­mes­tic prod­uct growth slow­down ‘throws up a chal­lenge for the econ­omy’

Mint Asia ST - - News - BAY SIT R ANJAN M ISHRA

In­dia’s eco­nomic growth un­ex­pect­edly slowed to 5.7% in the June quar­ter, the slow­est pace in three years, un­der­lin­ing the dis­rup­tion caused by the un­cer­tainty re­lated to the roll­out of the goods and ser­vices tax (GST) even as the econ­omy is strug­gling to re­cover from a shock de­mon­eti­sa­tion.

A sur­vey of econ­o­mists by Reuters had seen growth pick­ing up by 6.6% in the June quar­ter. GDP grew 6.1% in the pre­ced­ing three months.

Fi­nance min­is­ter Arun Jait­ley said it is a mat­ter of con­cern that GDP growth in the first quar­ter has slipped.

“It throws up a chal­lenge for the econ­omy. In com­ing quar­ters we re­quire—both in terms of pol­icy and in­vest­ments—to work more to im­prove upon this fig­ure,” he added.

The GDP print is quite shock­ing and in­di­cates what could be a sec­u­lar down­turn in eco­nomic ac­tiv­ity, said Ab­heek Barua, chief econ­o­mist at HDFC Bank Ltd. “I don’t see it as a tran­si­tory slow­down even though growth may pick up from its cur­rent level in com­ing quar­ters. Trends in fac­tory out­put and cap­i­tal goods point to­wards a fun­da­men­tal loss in mo­men­tum,” he said.

The slower pace of growth also means In­dia lost the tag of the world’s fastest-grow­ing large econ­omy for the sec­ond straight quar­ter to China, which grew 6.9%.

For­mer fi­nance min­is­ter P. Chi­dambaram tweeted: “Our worst fears have come true. Sub-6% growth is a catas­tro­phe. The slide in econ­omy con­tin­ues. Slow growth, low in­vest­ment and no jobs. An ex­plo­sive cock­tail.”

Un­cer­tainty re­lated to the roll­out of GST from 1 July, about eight months af­ter the gov­ern­ment can­celled 86% of the cur­rency in cir­cu­la­tion, saw man­u­fac­tur­ers cut­ting pro­duc­tion and deal­ers of­fer­ing dis­counts on items such as cars.

As a result, man­u­fac­tur­ing growth slowed to 1.2% in the June quar­ter from 5.3% in the pre­ced­ing quar­ter while min­ing ac­tiv­ity con­tracted by 0.7%.

How­ever, con­struc­tion ac­tiv­ity re­vived marginally from the neg­a­tive print (-3.7%) in the March quar­ter to 2% in the June quar­ter, signs that the im­pact of de­mon­e­ti­za­tion is re­ced­ing.

Trade, ho­tels, and trans­porta­tion, im­pacted by de­mon­e­ti­za­tion in the March quar­ter (6.5%), re­bounded to grow 11.1%, mostly due to dis­count sales ahead of GST im­ple­men­ta­tion.

Growth in gov­ern­ment spend­ing held up close to dou­ble dig­its at 9.5%, con­tin­u­ing to sup­port over­all eco­nomic growth.

The pickup in gov­ern­ment ex­pen­di­ture was re­flected by the latest Con­troller Gen­eral of Ac­counts data which showed that the gov­ern­ment ex­hausted 92.4% of fis­cal deficit tar­get within the first four months (April-july) of the fis­cal year 2017-18.

While pri­vate con­sump­tion slowed from the March quar­ter, in­vest­ment de­mand turned pos­i­tive in the June quar­ter af­ter con­tract­ing in the pre­vi­ous quar­ter.

Chief statis­ti­cian of In­dia T.C.A. Ananth said ris­ing cost of in­ter­me­di­ate goods and in­ven­tory draw­down in an­tic­i­pa­tion of GST im­ple­men­ta­tion led to man­u­fac­tur­ing growth fall­ing sharply.

“I ex­pect a re­vival in the sec­ond and third quar­ters as man­u­fac­tur­ers nor­mal­ize their stock po­si­tions. But this will be sub­ject to how well they have in­te­grated with GST,” he added.

The sec­ond vol­ume of the Eco­nomic Sur­vey, re­leased ear­lier this month, said a raft of de­fla­tion­ary im­pulses is weigh­ing on the econ­omy, which is likely to miss the 7.5% up­per band of its fore­cast growth range this year.

The first vol­ume of the Eco­nomic Sur­vey re­leased in Jan­uary had pro­jected growth in the range of 6.75-7.5% in 2017-18 against 7.1% in 2016-17.

The Sur­vey warned that with mon­e­tary pol­icy hav­ing been tighter than as­sumed and the ru­pee’s ap­pre­ci­a­tion against the dol­lar, the bal­ance of risk has shifted to the down­side and it is un­likely that the up­per band of the pro­jected growth rate will be achieved.

The Re­serve Bank of In­dia’s an­nual re­port re­leased on Wednesday re­it­er­ated its fore­cast for gross value added (GVA) to grow at 7.3% in 2017-18, as against 6.3% in 2016-17.

GVA, which is ar­rived at by de­duct­ing net in­di­rect tax from GDP, grew 5.6% in the June quar­ter, the same as in the March quar­ter.

At the same time, the re­port flagged risks such as an over-lev­er­aged cor­po­rate sec­tor and a stressed bank­ing sec­tor, be­cause they could de­lay pri­vate in­vest­ment de­mand re­vival. It also noted that farm loan waivers could add to up­ward pres­sures on in­fla­tion.

HDFC Bank’s Barua said another win­dow for a rate cut may open though with a lag. “Once RBI is com­fort­able with the pickup in in­fla­tion, which I ex­pect not to be sharp, it may ex­er­cise the op­tion of another pol­icy rate cut,” he added.

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