India's GDP Slumps To 5.7% On Back Of New Tax, Note Ban

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02 September, 2017

The gross domestic product (GDP) numbers for the April-June quarter of the current fiscal (2017-18) show how economy unexpectedly slowed to a three-year low of 5.7% as against a 7.9% growth in the same quarter last year.

Experts feel demonitisation and huge destocking before the launch of the Goods and Services Tax (GST) can be the reasons for the unexpected slow down of India's economic growth to 5.7 percent in the June quarter, the slowest pace in three years.

Dr. Soumya Kanti Ghosh, Group Chief Economic Advisor at State Bank of India stated economic growth plunged below 6% as gross value added (GVA) at basic prices grew by 5.6% in Q1FY18 - a sharp 200 basis points less than the corresponding quarter of the previous year.

Editor's Remarks: The figures came in well below analysts' forecasts of 6.6% and were down from the 6.1% posted in the first quarter of the year and 7.9% in the second quarter of 2016. "This is the lowest growth we've seen in the past couple of years and going to even 7.0 percent for this financial year will be a big challenge".

Expressing concern over the GDP numbers, Finance Minister Arun Jaitley said manufacturing growth rate seems to have bottomed out as GST has been implemented and destocking of pre-GST stocks is nearly complete. "Since it was announced that GST would come into operation from July 1, most manufacturers were de-stocking during period April-June".

The economic activities which registered growth of over seven percent in Q1 of 2017-18 over Q1 of 2016-17 were trade, hotels, transport and communication, public administration, defence, electricity, gas, water supply and other utility services.

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A separate set of official data showed that growth of eight core sectors slowed to 2.4 per cent in July due to contraction in output of crude oil, refinery products, fertiliser and cement. Agriculture, growing at 2.3% could match up to 2.5% seen in the corresponding quarter a year ago. These are the cash intensive sectors that took the worst hit after the demonetisation.

Finance Minister Arun Jaitley on Q1FY18 GDP numbers said, "Considering the 28% drop in GDP numbers, investments and policy will have to be pulled up in the coming quarters". "I would expect GDP for the full year will be somewhere closer to 6 percent".

"Gross fixed capital ratio turned positive, investment improved", during the first quarter, he added.

Prime Minister Narendra Modi announced last November the withdrawal of high-value bank notes constituting 86% of the currency in circulation to dredge up illegally stashed wealth.

In absolute terms, the amount ranged between Rs 8.5 lakh crore and Rs 9.4 lakh crore.

"The lingering impact of demonetisation is visible in the low growth of construction". So, we are going forward to a hard time and let's hope things improve from Quarter 2 of this year, " Sunil Shah said. It raises the likelihood of the Reserve Bank delivering a growth-propping rate cut later this year, some analysts said.

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