FY17 growth at 7.1% sans note ban effect: Optimistic, say analysts

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After a slight acceleration in the September quarter driven by consumption including the government variety, India’s economy had already shifted into low gear when the currency crunch hit it. The expansion of gross domestic product (GDP) will slow to 7.1% in the current financial year from 7.6% in 2015-16, the Central Statistics Office (CSO) said on Friday, releasing the first advance estimate.

The CSO said it had had the benefit of the first-half GDP growth figure of 7.2% and several other subsequent high-frequency data points up to October and a peek into the (unreleased) November industrial production, but shied away from gauging demonetisation’s impact.

However, the amorphous nature of the estimate, pulled back by a month to suit the government’s plan for an early Budget, will make budget-making tougher. The uncertainty over the goods and services tax (GST) had already obscured policymakers’ foresight.

While extrapolating the available data for the full year, the government’s statisticians exercised extra caution to not enter into speculation — the segment of “financial, insurance, real estate and professional services”, for instance, has been estimated without factoring in the high volatility since November 10 on aggregate bank deposits as it was an outlier. Justifying this, chief statistician TCA Anant said the CSO shunned any “untried, unverified method to make adjustments to the GDP” and stuck to its good housekeeping practices.

However, the CSO — which says real GDP will expand just 7% in the second half of the year — expects government’s already robust consumption spending to increase further. It expects nominal GDP to grow 11.9% over FY16 to R51.9 lakh crore, even higher than the R150.6 lakh crore budgeted. This, however, looked optimistic.

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While government final consumption expenditure (GFCE) grew 18.8% in Q1FY17 and 15.2% in Q2FY17, the CSO estimated the full-year GFCE growth at an ambitious 23.8%.

Also, while gross fixed capital formation fell 1.9% in Q4FY16, 3.1% in Q1FY17 and a steep 5.6% in Q2FY17, the advance estimate is that for the full year, this will be more or less flat (-0.2%).

Given the post-demonetisation hit to consumption and investment, many analysts said these might prove to be overestimates. Crisil Research said advance estimate by CSO were likely to have an upward bias, especially in terms of government consumption growth (23.8%) and government services growth (12.8%). “Agriculture and industrial sector growth estimates are in line with our forecasts,” Crisil, which had estimated GDP to grow at 6.9% FY17, said. “In the wake of demonetisation, even if the situation limps back to business as usual by the end of fourth quarter, not all impacted sectors may rebound equally. Sectors hitherto dealing in high-value cash transactions such as real estate (and thereby related sectors such as cement and other building products), and luxury automobiles, may take longer to revive compared with others.” If GFCE has to grow at the estimated rate for FY17, the growth in second half should be as much as 32.5%.

Tax buoyancy experienced thus far could be slightly dented in the remaining months of the year due to the slowdown in consumption after demonetisation. Practically, the additional tax revenues from the two income disclosure schemes would materialise only in 2017-18. Even though bank credit growth — which hit a 62-year trough of an annual 5.1% in the fortnight through December 23, according to SBI chief economist Soumyakanti Ghosh — could look up thanks to deposit surge and interest rate reductions, consumption and investment levels envisaged by CSO for the second half of the year could still be hard to reach.

The estimated 33.5% fall in valuables for FY17 compared with 0.3% growth last year reflects a massive plunge in gold imports. India’s gold imports crashed 55% in the first half of this fiscal from a year earlier, before picking up in the build-up to Diwali.

Finance minister Arun Jaitley had cited a 26.2% annual jump in indirect tax collection and nearly 7% rise in winter crop sowing to suggest demonetisation didn’t hurt the economy as much as assumed by many critical commentators. However, data showed excise duty collections, which rose an annual 41% in October, increased only 32% in November. Also, the growth in service tax mop-up slowed to just 13.3% in November from as much as 68.8% in the previous month. The slowdown in excise revenue growth in November was despite another round of hike in the excise duty on petroleum products in the month. The estimate of gross value added in farm sector is made using the first advance estimates of production of major kharif crops for 2016-17 and targets based on rabi sowing.

About a dozen private forecasters have pared their growth forecasts to 6.5-6.9% for FY17, gauging the impact of demonetisation which, many believe, could linger for two to three quarters. “I am very worried with the projected growth rate,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance. “Take demonetisation into account, the rate will substantially drop,” he said, adding that he expected full-year growth to be well below 6.8%.

The Reserve Bank of India-anchored monetary policy committee had kept key rates unchanged in the latest monetary policy review despite the Q2FY17 GDP growth coming in at a lower-than-expected 7.3%. The RBI had projected only a 50-basis-point drop in gross value addition in the economy in 2016-17 due to demonetisation.

Pronab Sen, the former chief statistician, said it’s clear from the advance estimate that the final growth rate for 2016-17 will be lower than anticipated once the impact of demonetisation is factored in. Sen said since corporate results are not available for the third quarter, the CSO has heavily relied on industrial production data to construct the growth rates for manufacturing and mining and quarrying. As the base year the index of industrial production hasn’t yet been updated, IIP data are out of date. So manufacturing and mining growth rates in the GDP data will be revised drastically.

The CSO has estimated India’s per capita income to cross Rs 1 lakh in FY17, up from Rs 93,293 in FY16.

Rupa Rege Nitsure, group chief economist, L&T Financial Services, said: “We expect industrial production growth to further ease to -2.16% y-o-y in November versus -1.87% in October.” This assumption base on many indicators, including the decline in PMI for manufacturing from 54.4 in October to 52.3 in November and new export orders losing momentum in November.