BUSINESS

GDP Grows 7.3% In September Quarter, But Demonetisation Clouds Future Outlook

Cold comfort.

30/11/2016 6:38 PM IST | Updated 30/11/2016 6:59 PM IST
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A man counts Indian rupee notes in Kolkata, India, on Tuesday, Feb. 19, 2013. India’s slowest economic expansion in a decade is limiting profit growth at the biggest companies even as foreigners remain net buyers of the nation’s stocks, according to Kotak Institutional Equities. Photographer: Brent Lewin/Bloomberg via Getty Images

NEW DELHI-- The Indian economy grew at 7.3 per cent in the September quarter of current fiscal, up from 7.1 per cent in the previous three months, mainly on improved performance of manufacturing, services and trade sectors.

The Gross Domestic Product (GDP) or national income was 7.6 per cent in the second quarter of the last fiscal.

According to the data released by the Central Statistics Office (CSO), the Gross Value Added (GVA), which is estimated at the basic price, showed a growth of 7.1 per cent in the second quarter of 2016-17, compared to 7.3 per in the year ago period.

However, Prime Minister Narendra Modi's crackdown on tax dodgers and counterfeiters by removing Rs 500 and Rs 1,000 banknotes from circulation has taken the economy down a very bumpy road. The GDP data released today does not reflect the impact to the economy from demonetisation.

"The move will weigh on GDP growth for a few quarters, dampening government revenues," warned credit ratings firm Moody's Investors Service, reported Reuters. "The decline in economic activity will lower corporate sales volumes and cash flows."

The GDP growth data is calculated under the new methodology at market price, while GVA is calculated primarily at factor cost. GDP is GVA plus taxes on products, minus subsidies on them.

The sectors which registered growth of over 7 per cent in July-September quarter are 'public administration, defence and other services', 'financial, insurance, real estate and professional services', 'manufacturing' and 'trade, hotels and transport and communication and services related to broadcasting', the data said.

Growth in agriculture; forestry and fishing; mining and quarrying and construction is estimated to be 1.8 per cent, (-)0.4 per cent, and 1.5 per cent respectively.

Modi expects the cash situation to become normal by end-December, but critics say he is being over-optimistic.

Meantime, consumers are spending less, which is hurting small producers who, in turn, are being forced to scale back their activities.

As a consequence, supply chains at small, medium and even larger companies are breaking down. Trucks are stranded with no money for fuel, workers won't load goods for free, and distributors can't pay up. Wholesale markets in many cities are shut.

The cash crunch has jeopardised production of key commodities and hurt rural communities - just recovering after two years of drought - as farmers lack cash to buy seeds and fertiliser. As a result, the area under cultivation for India's winter crop has declined.

"Given that the growth recovery has still not taken full hold, the impact of this demonetisation ... could delay the private corporate capex recovery," analysts at Morgan Stanley wrote in a note, adding that they don't expect that recovery to happen before 2018.

At least the potential for lower inflation holds out some hope that the Reserve Bank of India will extend its easing cycle with a quick interest rate cut.

"The central bank might prefer to bring forward the rate cut to December to support growth and tap the favourable inflation outlook," said Radhika Rao, an economist with DBS Bank.

With inputs from PTI and Reuters

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