India’s GDP growth hits three-year low in Q1

NEW DELHI: India’s economy unexpectedly slowed further to a three-year low in the quarter through June, delivering a blow to Prime Minister Narendra Modi who is facing criticism for disrupting business activity through his shock cash squeeze last year.

Gross domestic product grew 5.7% in the first quarter of the financial year, its slowest pace since the JanuaryMarch quarter 2014, according to data released yesterday.

That compared with a forecast of 6.6% growth by economists in a Reuters’ poll, and was slower than 6.1% growth recorded in the previous quarter.

Last year, India’s economy clocked 7.1% for the first quarter.

Modi’s decision last November to scrap high-value old banknotes, in a bid to flush out the money Indians hide from the taxman, wiped out about 86% of currency in circulation virtually overnight.

While his drive to unearth unaccounted wealth did not deliver the desired result, it pounded consumer demand in an economy where most people are paid in, and buy what they need with, cash.

Confusion ahead of the launch of a new goods and services tax (GST) also seems to have dampened economic activity.

“GDP numbers are certainly disappointing,” said Abheek Barua, chief economist with HDFC Bank Limited in New Delhi.

“The numbers seem to suggest that the slowdown from last quarter has intensified due to the combination of long-term slowdown and temporary shock factors like demonetisation and GST (goods and services tax) destocking.

“A rate cut from the Reserve Bank of India (central bank) now becomes more and more probable, not immediately, but over the next six months,’’ he said.

“We have to revise our GDP outlook numbers for the full year closer or perhaps lower than 7%.”

In February, the government had forecast GDP growth of between 6.75 and 7.5% for 2017/18.

However, in a survey released August, the government warned several factors including the introduction of the GST and appreciation of the Indian currency, could drag on growth.

“The impact of demonetisation has faded, definitely. But the next quarter impact will be of GST, which will have an adverse impact on growth overall,’’ Anjali Verma, economist at PhillipCapital India Pvt Ltd.

“GST impact is just a one quarter phenomena, or at best one month after that. But then in the medium to long term it’s expected to be a positive.

“I would expect GDP for the full year will be somewhere closer to 6%. We don’t expect any rate cuts from here on. RBI will stay hooked on to inflation,” she said.

The slowdown was led by the manufacturing sector, which expanded at 1.2% from a year earlier compared with a 10.7% growth last year.

“The lingering impact of demonetisation is visible in the low growth of construction. The GDP and GVA (growth value added) estimates have undershot our and market expectations by a considerable degree,’’ said Aditi Nayar, economist at ICRA Limited.

“The combination of lower volumes and higher discounts pre-GST (goods and services tax) and positive WPI (wholesale price inflation) weighed upon the manufacturing sector in the first quarter.”

The financial, insurance, real estate and professional services sectors also slowed to 6.4% in the quarter from 9.4% a year ago.