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Resource centre on India's rural distress
 
 

Achchhe din's worst day
-The Telegraph

The Central Statistics Office reported today that economic growth sank to a three-year low at 5.7 per cent, striking at the core of Prime Minister Narendra Modi's promise of achchhe din.

The sharp slowdown is a result of the two biggest disruptive measures taken by the Modi government: demonetisation and the goods and services tax. The double whammy has badly crimped factory output and squeezed the services sector.

The GDP growth figure was far lower than a median forecast of 6.6 per cent in a Reuters poll of economists ahead of the announcement.

Quarterly growth
 
India has not seen such a low-ball growth rate since the quarter ended March 2014 when it had dipped to 4.6 per cent. But there is a caveat here: the two figures are not comparable because they have been calculated on the basis of different base years.

This is the second straight quarter where growth in India's economy has lagged that in China, which reported a growth of 6.9 per cent during April-June 2017.

"It is a matter of great concern that growth has fallen to 5.7 per cent," finance minister Arun Jaitley said, grappling with a fresh problem less than 24 hours after RBI data brought under stress the government's claims that demonetisation was a success.

Former finance minister P. Chidambaram weighed in and tweeted: "Our worst fears have come true. Sub-6 per cent growth is a catastrophe."

The economy had started to stutter from the fourth quarter of the previous financial year. India's inflation-adjusted GDP had tumbled to 6.1 per cent in January-March 2017. Gross domestic product (GDP) growth in the same period a year ago was 7.9 per cent.

The sharp slowdown had triggered gloomy forecasts as businesses struggled to come to terms with the after-effects of the demonetisation.

The decision to rush through with the GST from July 1 forced the manufacturing companies to cut back production and trim inventories as they braced for a slowdown in consumption even as small traders and retail agents struggled to come to grips with the onerous compliance requirements under the new tax regime.

Jaitley said the de-stocking operation in the run-up to GST had bottomed out and he was confident that the economy would grow by 7 per cent this year.

Earlier this week, Jaitley said tax collections under GST had come to over Rs 93,000 crore in the month of July far exceeding expectations. He claimed that only 63 per cent of the tax assessees had filed their returns and this figure would rise.

The finance minister said he was pinning his hopes on the resurgence in the service sector and believed that there were signs of a pick-up in investments.

The CSO figures, however, show that there is very little indication of any effort to pump prime a faltering economy. In fact, investment growth - reflected by gross fixed capital formation - slowed sharply to 1.6 per cent from 7.4 per cent in the same period last year.

"The economy, especially the manufacturing sector, has lost its growth momentum because of the disruption caused by demonetisation," said Prof. Biswajit Dhar of Jawaharlal Nehru University's Centre for Economic Studies and Planning. "I expect that even the services sector will be hit by the domino effect, though that is not captured by today's data."

Disaggregated data showed that manufacturing grew by just 1.2 per cent during the quarter compared with 10.7 per cent in the same quarter last year. Mining shrank 0.7 per cent, the construction sector grew by a mere 2 per cent, and farm sector growth dipped to 2.3 per cent from 2.5 per cent a year ago.

Financial services grew by 6.4 per cent in April-June 2017, compared with 9.4 per cent in the same period last year.

N.R. Bhanumurthy of the National Institute of Public Finance and Policy said higher public spending in the first quarter reflected the "front-loading of government expenditure because of an early budget. But this may taper off in the quarters ahead."

Economists feel that the informal economy, which accounts for 45 per cent of the country's GDP of $2.264 trillion, was in tatters in the first six months of this calendar year because of the demonetisation-induced cash crunch.

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