Will demonetisation pull down Q3 GDP growth to below 6%?


So, will India’s Q3 GDP growth dip below 6 per cent in the aftermath of the Centre-led demonetisation drive? At least the International Monetary Fund (IMF), SBI chief economic advisor Soumya Kanti Ghosh and a key finance ministry official believe so.

Ghosh says GDP growth in the third quarter will stand at 5.8 per cent as against 7.2 per cent in the same quarter last year, while Q4 will see a higher growth at 6.4 per cent as against 7.9 per cent in the year-ago period.

“Overall, our estimate of GDP growth in the second half of FY17 is 6.1 per cent with a downward bias. We estimate FY17 growth at 6.6%,” says Ghosh.

On Wednesday, the IMF also indicated that GDP growth in Q3 will be below six per cent.

It pegged the growth at around 6 per cent for the second half. For the fourth quarter, it said the growth would be 6.2 per cent.

The IMF has also scaled down India’s economic growth to 6.6 per cent for 2016-17 from 7.6 per cent estimated earlier.

In fact, according to a finance ministry senior official economic, growth will stand at 5.5 per cent in the third quarter of the financial year 2016-17.

If the growth really turns out to be sub-six per cent, it would be the lowest economic expansion in at least seven quarters.

According to Ghosh, sectors like construction, real estate, cement and fast-moving consumer goods are likely to witness a decline in sales in Q3 but recover thereafter.

Ghish adds that construction companies having a high share of government orders may find some solace as they are likely to be less impacted.

The Central Statistics Office (CSO) came out with its advance estimates that projected the economy to grow by 7.1 per cent  in 2016-17. Since it did not take into account the impact of demonetisation, the CSO will come out with a second estimate with revised GDP figures for the third quarter on February 28.

Dismissing the CSO estimates, Ghosh says that if one goes by the projected growth of 7.1% in the current financial year, the Q3 and Q4 GDP growth would be around 6.1% and 7.8%, respectively. This, he says, is quite impossible given the extent of liquidity shock that has led to a drastic cut in consumer spending.

Icra’s Aditi Nayar, however, differs by saying that the GDP growth is likely to decline to 6.5 per cent in Q3.

While the note ban would affect some of the sub-sectors in the industry, the robust kharif harvest is expected to contribute to a turnaround in the performance of the agriculture, forestry and fishing sectors, adds Nayar.

Growth of agriculture and allied sector in Q3 is pegged at 5 per cent as against a contraction of 1 per cent in the corresponding quarter of the previous financial year.

“Since the early estimates of the quarterly figures would rely heavily on the available data from the formal sector, which is expected to have weathered the note ban better than the informal sector, the first estimates of Q3 may not fully capture the impact of the note ban. Subsequent estimates that draw from a wider data source may well revise the growth downward,” she adds.