December quarter GDP growth surprising, says Fitch Ratings


New Delhi: The US-based Fitch Ratings today appeared to pick holes in the government’s 7 per cent growth estimate for the December quarter despite the cash crackdown, saying official data suggesting strong private consumption are at odds with real services activity.
The rating agency, however, projected a robust 7.1 percent growth for 2016-17 and 7.7 percent in the following two financial years (2017-18 and 2018-19).

Fitch said estimates released by the Central Statistics Office (CSO) last week showed GDP was “hardly hit” in October-December by the cash crunch after the government’s sudden move to pull out 86 percent of currency in circulation overnight.

The 7 percent GDP growth in the third quarter is marginally lower than 7.4 percent expansion in the previous quarter.

“This number looks somewhat surprising as real activity data released since demonetisation pointed to weak consumption and services activity because these transactions are cash-intensive. By contrast, official data suggest that private consumption was strong in October-December (though services output growth moderated quite substantially),” it said.

In its latest Global Economic Outlook (GEO), Fitch said one reason for this discrepancy could be the inability of the official data to capture the negative effect of demonetisation on the informal sector.

“However, the formal sector also remained surprisingly robust. This raises the possibility that these initial estimates of the growth impact of demonetisation could well be underestimated, with the possibility of revisions to official GDP data later on,” it said.

Fitch’s projection of 7.1 percent economic growth for this fiscal is in line with the estimates of CSO and global think-tank OECD.

This growth rate compares to 7.8 percent expansion in 2015-16.

It estimated retail price inflation to rise to 4.6 percent in 2017-18 and 5 percent in 2018-19, from 3.4 percent in the current year.

For the world, it said growth slowed to 2.5 percent in calendar 2016, from 2.7 percent, which is projected to pick up to 2.9 percent in 2017 and 3 percent in the following year.

China, however, is seen to decelerate to 6.3 percent in 2017 and 5.7 percent in 2018, from 6.7 percent in 2016.

Global oil prices may rise to USD 52.5 in 2017 and USD 55 in 2018, from an average of USD 45.1 per barrel in 2016.

Forecasting robust growth rates for India in the next two fiscal, Fitch said: “Gradual implementation of the structural
reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 percent hike in civil servants’ wages at the state level.”

It said macroeconomic policy support to growth may gradually fade. “There may still be some positive impact from the previous accommodative monetary policy stance, but the Reserve Bank of India signalled in its February meeting that its interest rate easing cycle had come to an end,” it added.

“We are now expecting the policy interest rate to stay at its current level of 6.25 percent. At the same time, the government announced in the last Budget the raising of the deficit target for 2017-18 to 3.2 percent of GDP, from 3 percent, which would support growth.