Indias Q2 GDP grows 7.3%, but slowdown ahead on demonetisation

Growth of real or inflation-adjusted gross domestic product (GDP) — the value of all goods and services produced in the country — moderated from 7.6 percent in July-September 2015, national income data released on Wednesday showed.
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Dec 01, 2016, 11.33 AM | Source: Moneycontrol.com

India's Q2 GDP grows 7.3%, but slowdown ahead on demonetisation

Growth of real or inflation-adjusted gross domestic product (GDP) — the value of all goods and services produced in the country — moderated from 7.6 percent in July-September 2015, national income data released on Wednesday showed.

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Indias Q2 GDP grows 7.3%, but slowdown ahead on demonetisation

Growth of real or inflation-adjusted gross domestic product (GDP) — the value of all goods and services produced in the country — moderated from 7.6 percent in July-September 2015, national income data released on Wednesday showed.

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Gaurav Choudhury (more)

Economy Editor, Moneycontrol |

India’s economy grew 7.3 percent in July to September, marginally quicker than the previous quarter’s 7.1 percent, but the revival could stutter in the coming months, hit by an economy-wide cash-crunch following the unexpected ban on Rs 500 and Rs 1,000 currency notes.

Growth of real or inflation-adjusted gross domestic product (GDP) — the value of all goods and services produced in the country — moderated from 7.6 percent in July-September 2015, national income data released on Wednesday showed.

While India remains the world’s fastest growing major economy ahead of 6.7% growth in China that is battling an industrial deceleration, question marks remain over its ability to hold on to that status following the demonetisation drive.

SPENDING HALT

The move will likely curtail consumer spending as households adjust to the new system. Household spending on aspirational and essential products have been the edifice of the India growth story.

It accounts for more than half of India’s GDP enabling it to cement its place as the world’s fastest growing major economy outpacing China.

According to the national income data, private final consumption expenditure (PFCE) during July-September at constant 2011-12 prices — a scale to measure household spending — was estimated at Rs 16.2 lakh crore, or about  54.9 percent of the gross domestic product (GDP).

Consumer spending as measured by PFCE grew 7.6 percent in July-September over the same quarter in 2015-16.

The “demonetisation” of Rs 500 and Rs 1,000 notes could also dampen consumer durable sales in rural areas where most transactions take place in cash, partially offsetting the gains from abundant summer rains this year after two years of successive drought.

The demonetisation will upset families’ spending plans on cars, televisions and refrigerators that peak during the wedding season during October-March.

Consumer durables output and sales could slowdown in the coming few months following the scrapping of high denomination currency notes and the limit on daily and weekly cash withdrawals.

INVESTMENT SLIDE

This delay in household spending could push back investment growth with firms already sitting on vast unused capacities in consumption-linked sectors.

Capital goods output, a metric to gauge capacity additions by companies, have contracted for 11 successive months mirroring faltering investment activity.

This could have a bearing on gross fixed capital formation (GFCF), a proxy for measuring investment activity. GFCF, at constant 2011-12 prices, fell (-) 5.6 percent in July-September over same quarter of 2015-16.

Share of GFCF (in current prices) as a proportion of GDP has also fallen to 29 percent in July-September this year, from 32.6 percent of the same quarter of 2015-16 and 29.6 percent in April-June this year.

The manufacturing sector grew 3.3 percent during the quarter from 9.2 percent in the same quarter of the previous year and 9.1 percent April to June.

Growth in the construction sector, a large employer for unskilled labourers, grew 3.5 percent in July-September from 0.8 percent in the same period of 2015 and 1.5 percent in April-June 2016.

Construction activity can be among the worst-hit by the currency drain out with most contract labourers working on sites paid in cash.

Good rains this year have likely helped in raising farm income this year.

Farm income grew 3.3 percent in July-September year, from 2 percent in the same quarter of 2015 and 1.8 percent in April to June 2016.

LIMITED PAY BONANZA EFFECT

Government spending (in inflation-adjusted constant 2011-12 prices), however, jumped 15.2 percent during the quarter compared to July-September in 2015-16, mirroring the higher salary payouts that were credited to employees’ accounts in August and September.

The government was hoping that good summer rains along with recently announced hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners will set off a cycle of spending and investment, with people expected to use higher incomes to buy cars and houses.

That remains unlikely now with most analysts warning of a sharp deceleration in the coming quarters in wake of the currency recall.

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Indias Q2 GDP grows 7.3%, but slowdown ahead on demonetisation

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