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GDP growth slows to three-year low of 5.7% in Q1 hit by note ban, GST disruption

The manufacturing sector crawled at 1.2 percent during April-June, mirroring the widespread de-stocking by companies ahead of the switchover to GST from July 1

August 31, 2017 / 07:43 PM IST

The Indian economy grew 5.7 percent in April-June, sharply lower than last year’s 7.9 percent expansion in the same quarter as also the previous quarter’s 6.1 percent growth, signs that the country was still reeling under the shock of demonetisation and disruption caused ahead of GST’s rollout.

Data released on Thursday by the Central Statistics Office (CSO) showed that India’s “real” or inflation-adjusted GDP grew at the slowest pace in 13 quarters and is still a long way off from returning to 8 percent growth path, last seen in 2015-16.

It is also the lowest growth since the Narendra Modi-led NDA government came to power in 2014.

India now lags China in the global growth rankings by a fair margin. China, which grew at 6.9 percent in the last two quarters, has bounced back as the world’s fastest growing major economy since January, regaining the status from India after two years.

Importantly, the CSO estimates shows that gross value added (GVA) grew 5.6 percent in April-June lower than the last year’s 7.6 percent growth during the same quarter.


The latest growth numbers is a throwback to 2013-14, when India slid to a decade low sub-5 percent growth, buffeted by a string of corruption scandals at home and uncertain external economic environment.

The government, however, said that the slowdown could be a one-off affair, given the large scale inventory clearance before GST’s rollout.

GVA growth has significantly fallen in the last few quarters, slipping to 5.6 percent in January-March. GVA, which is GDP minus taxes, serves as a more realistic proxy to measure changes in the aggregate value of goods and services produced in the economy.

GDP growth may have raced slightly ahead of GVA, driven by strong indirect tax collections in April-June, masking a wobbly state in factories and firms.

The effect of the sudden flushing out of high-value notes in November 2016 and the resultant slowdown in household spending and corporate investment may well explain the current slowdown in an economy that was until recently an engine of global growth GVA.

The widespread de-stocking by companies and traders ahead of the switchover to goods and services tax (GST) from July 1 may have also had an impact on the broader economy’s growth.

The manufacturing sector crawled at 1.2 percent during the quarter-ended June from a 10.7 percent growth in the same period last year. The data was emblematic of the disruption caused ahead of GST’s rollout.

Companies had significantly scaled down production in June as part of a business strategy to carry over as little old stock as possible into July, triggering an unexpected mid-year pre-GST “sale” season on many products at heavy price markdowns.

Rise in cost and reduced inventory are two factors responsible for reduced GVA, Chief Statistician TCA Anant said today.

“Businesses have pulled down inventory due to anticipation of the rollout of GST (from July 1)…As companies adopt GST, their inventory position will become normal,” Anant said.

Gross fixed capital formation (GFCF), a useful metric to measure corporate investment activity fell to 29.8 percent of GDP (in 2011-12 prices) from 31 percent in the same quarter last year, mirroring companies have not added capacity lines because of muted demand.

GFCF grew 1.16 percent during the quarter compared to 7.39 percent in the same period in 2016.

The national income data showed GVA in the private corporate sector, which accounts for more than 75 percent in the manufacturing sector, fell 0.9 percent at current prices during April-June from a 10.2 percent growth in the same quarter of the previous year.

GVA growth in the quasi corporate and unorganised segments slowed down to 1.8 percent during the first quarter of 2017-18 from 6.7 percent last year.

The farm sector stood out as a growth hotspot aided by the timely arrival of monsoon rains. It grew 2.3 percent in April-June from 2.5 percent in the same quarter last year.
first published: Aug 31, 2017 05:39 pm

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