The Indian economy is expected to expand at its slowest pace in the four years since the Narendra Modi government took office, as economic activity was hit by the twin blows of demonetization and implementation-related issues of the goods and services tax (GST).
The government forecast economic growth slowing to 6.5% in the year to 31 March from 7.1% in the previous year.
The forecast released by the Central Statistics Office (CSO) assumes that the economy is on a recovery path. The economy grew at 6% in the six months ended 30 September, indicating that it will accelerate to 7% in the second half ending 31 March, if the forecast is to come true.
“GDP growth of 6.5% for 2017-18 implies growth of 7% for the second half. Confirms strong turnaround of the economy,” economic affairs secretary Subhash Chandra Garg said in a post on Twitter.
Nominal GDP, or gross domestic product at market prices, is expected to grow at 9.5%, slower than the 11.75% growth assumed in the 2017-18 budget. Nominal GDP will be used as the benchmark for most indices such as fiscal deficit in Union Budget 2018, to be presented by finance minister Arun Jaitley on 1 February.
T.C.A. Anant, chief statistician of India, said the lower-than-anticipated nominal GDP growth will lead to “marginal slippage” in the fiscal deficit target for 2017-18—from 3.24% of GDP estimated in the budget to 3.29%—assuming the government borrows what it budgeted for the year. Since the government has increased its spending through supplementary demands for grants and has communicated that it may borrow Rs50,000 crore more by 31 March, the actual fiscal slippage could be more. This may also make it difficult for the finance minister to stick to his fiscal consolidation roadmap of bringing down the fiscal deficit to 3% of GDP by 2018-19.
CSO forecast that the agriculture sector will grow at 2.1% in the current financial year, slower than 4.9% in the previous year. Manufacturing is likely to decelerate sharply to grow at 4.6%, compared with 7.9% a year ago, it said.
While demonetization of high-value banknotes in November 2016 was expected to have disrupted supply chains in the informal economy, the complex filing procedures of GST and delay in refund of input credits may have impacted exporters and small and medium enterprises, forcing companies to pare production and stocks, leading to a decline in manufacturing activity.
Electricity and trade & hotels sectors are the only ones that are expected to grow at a faster pace in FY18 compared with the previous financial year, at 7.5% and 8.7% respectively.
Pronab Sen, former chairman of the National Statistical Commission, said 6.5% GDP growth may be an over-estimation based on growth rate in indirect taxes assumed in the budget. “The buoyancy in indirect taxes, including GST, is unlikely to be as high as assumed in the budget. GDP growth for FY18 may settle down at 6.3%,” he added.
However, Aditi Nayar, principal economist at Icra Ltd, said since the advance estimates for the full year are based on limited data for different sectors, they do not fully factor in the expected pickup in growth in the later months of FY18, related to a favourable base effect.
“At present, we expect GVA (gross value added) growth to rise to around 6.7% in third quarter and a sharp 7.5% in the fourth quarter of FY18. For FY18 as a whole, we continue to expect GVA and GDP growth to print at 6.5% and 6.7%, respectively, higher than the advance estimates of 6.1% and 6.5%,” she added.
The GVA estimate of 6.1% by CSO is much lower than the 6.7% growth projected by Reserve Bank of India in its latest bi-monthly monetary policy review on 6 December.
While growth in private consumption is expected to slow to 6.3% in FY18, investment demand growth is estimated to quicken to 4.5% during the same year.
Public expenditure, which was the driver of economic growth in the previous year, is likely to slow to 9.4% against 11.3% a year ago.
Since the first advance estimates of GDP are based on data for only seven to eight months, most analysts are of the view that the second advance estimates to be released on 28 February, based on actual data for three quarters, and the provisional estimate to be released on 31 May will give a better picture of the health of the economy.