Hit by destocking in the run-up to the July 1 launch of the Goods and Services Tax (GST) and reeling under aftershocks of demonetisation, India’s economic growth on Thursday slipped to a three-year low of 5.7 per cent during April-June quarter from 6.1 per cent in the preceding quarter. The manufacturing growth also “bottomed out” in the first quarter of this financial year.
Now, India lags behind China in the global growth rankings by a fair margin. China grew at 6.9 per cent in the last two quarters, bouncing back as the world’s fastest growing major economy since January.
Admitting the slowdown of the economy, Finance Minister Arun Jaitley on Thursday said that India’s Gross Domestic Product (GDP) growth rate at 5.7 per cent in Q1 is a matter of concern. “While manufacturing bottomed out in Q1, services improved and gross fixed capital formulation turned positive,” Jaitley said at a Press conference just after the GDP growth data for Q1 was released.
According to the data, the expansion in GDP was 6.1 per cent in the preceding quarter and 7.9 per cent in the same period last fiscal. The previous low of 4.6 per cent was recorded in January-March 2014. “Gross Value Added (GVA) in the manufacturing sector fell sharply to 1.2 per cent, from 10.7 per cent year on year, as the businesses focused more on clearing inventories rather than production ahead of the July 1 launch of GST,” it said.
India’s economic growth decelerated to 5.7 per cent in the first quarter of 2017-18 on the back of destocking activities undertaken by the manufacturers ahead of GST implementation on July 1 this year. Besides, manufacturing dipped to 1.2 per cent from 5.3 per cent in the previous quarter
due to uncertainty surrounding GST.
However, construction activities revived marginally from the negative print (-3.7 per cent) in the March quarter to 2 per cent in June quarter. Trade, hotel transportation impacted by demonetisation in the March quarter (6.5 per cent) revived to grow at 11.1 per cent.
On the other hand, the 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.
Uncertainty about new indirect tax rates under GST prompted a host of industries, including carmakers, FMCG companies and garment manufacturers, to clear their stocks.
However, Chief Statistician TCA Anant attributed the fall to the decline in inventories ahead of the rollout of GST. “The drop in growth was not linked to note ban,” he asserted although.
Anant further said that as companies took to GST, inventory has returned to normal levels which will help revive growth. The data released by the Central Statistics Office (CSO) came in below market expectations, which predicted it to be at least a tad higher than January-March growth figure of 6.1 per cent.
According to the data, there was a slowdown in the agricultural sector too. GVA in the first quarter was 2.3 per cent compared to 2.5 per cent in the similar period last year.
Reacting to the Government data, India Inc as well economists also expressed disappointment over the country’s economic growth. Industry body PHDCCI said ease of doing business remains a major concern as manufacturing firms, particularly labour intensive units, are impacted by various stringent laws and compliance costs. “Going ahead, the breakthrough in GST should also be followed by reforms in labour laws such as a single uniform labour law across the country,” PHDCCI president Gopal Jiwarajka said in a statement.
However, former chief statistician Pranab Sen said it was expected that the first quarter GDP would be weak because of GST. “But, in my particular case, this is about 40 basis points lower than what I was considering. I would be looking at probably now sub-6.3 per cent for the full year,” he added.
leading economist DK Joshi of Crisil termed the GDP number as disappointing as the expectation was that the growth would be 6.5 per cent.
Analysts also attributed the fall in GDP growth to demonetisation in addition to teething problems after the rollout of GST. “The lingering impact of demonetisation is visible in the low growth of construction. The GDP and growth value added or GVA estimates have undershot our and market expectations by a considerable degree. The combination of lower volumes and higher discounts pre-GST and positive WPI or wholesale price inflation weighed upon the manufacturing sector in Q1,” said Aditi Nayar, economist, ICRA.
India’s fiscal deficit at July-end touched 92.4 per cent of the Budget mainly because of front-loading of expenditure by various Government departments. During the same period of 2016-17, it was 73.7 per cent of the target.
Economic activities that registered growth of over 7 per cent in the first quarter on an annual basis are trade, hotels, transport and communication and services related to broadcasting, public administration, Defence and other services and electricity, gas, water supply and other utility services.
Growth in agriculture, forestry and fishing, mining and quarrying, manufacturing, construction and financial, insurance, real estate and professional services is estimated to be 2.3 per cent, (-) 0.7 per cent, 1.2 per cent, 2 per cent and 6.4 per cent, respectively, during this period.