Demonetisation, GST disruptions to cool India’s GDP growth to 4-year low

Live mint By Shaloo Shrivastava Wed, Oct 25 2017. 11 47 AM IST

India’s economy will likely grow at its slowest pace in four years this fiscal year, as demonetisation and GST have disrupted business activity, shows Reuters poll

India’s economy will grow at 6.7% in the fiscal year ending March 2018. Photo: Mint

Bengaluru: India’s economy will likely grow at its slowest pace in four years this fiscal year, a Reuters poll showed, as a currency ban and the new goods and services tax (GST) have disrupted business activity and dampened consumer demand.

Asia’s third-largest economy will grow at 6.7% in the fiscal year ending March 2018, the slowest since the new methodology of measuring gross domestic product (GDP) was introduced in the 2014-15 fiscal year, according to the latest poll of 30 economists.

The poll was taken on 12-24 October, closing just before India announced a $32.43 billion plan to recapitalise state banks, a bid to tackle a major drag on the economy.

While the latest poll’s number for this year matches the International Monetary Fund’s toned-down forecast - that was 7.2% earlier - it is a sharp decline from 7.3% the July Reuters poll showed.

But despite the broad and marked slowdown expected in economic activity, India’s projected growth rate will be second to the world’s fastest growing major economy - China - if predictions are met.

A majority of economists said the risk to their already lower outlook for Indian growth this fiscal year is skewed further to the downside as stressed corporate balance sheets prevent a recovery in private capital spending and mounting bad loans at Indian banks remain a burden.

All but three of 23 respondents who answered an extra question said the government had imposed too many sweeping changes for the economy in a short period of time, referring to demonetisation and the GST, and that has lowered growth expectations.

“Demonetisation was unnecessary and had a huge disruptive effect. Even before the economy could recover from that shock, came (the) GST,” said Kunal Kundu, vice-president and India economist at Societe Generale.

“More importantly, the government was not prepared adequately enough, thereby transmitting further shock to the slowing economy.”

Prime Minister Narendra Modi’s decision last November to scrap high-value old banknotes wiped out about 86 percent of currency in circulation virtually overnight in an economy which is largely cash-based.

That has hurt consumer spending, which powers more than half of the $2 trillion economy.

But just when some improvement in data raised hopes that the impact of the cash clampdown had been absorbed, confusion among businesses on pricing goods and services after the 1 July implementation of GST has impacted activity.

The economy grew at 5.7% annually in the April-June quarter, its lowest level in more than three years and well below expectations.

However, nearly three-fourths of 23 respondents who answered an extra question said India does not need a stimulus package and instead should focus on fiscal discipline which is vital for investment from outside the country to flow in.

“There is limited scope for any stimulus when the budget fiscal deficit projections will anyways be breached on account of revenue shortfall,” said Abhishek Upadhyay, economist at ICICI Securities Primary Dealership.

Despite bleak growth expectations, the Reserve Bank of India is forecast to keep key policy rates on hold through mid-2019, focusing on anchoring inflation.

The latest Reuters poll predicted retail inflation to average 3.5% this fiscal year, unchanged from the July median but below the RBI’s medium-term target of 4.0%.

Inflation was expected to average 4.5% in 2018-2019, compared to 4.3% in the previous poll.

“With inflation trending up directionally and RBI’s insistence on 4% target on a durable basis, a convincing case for a rate cut appears less plausible,” said Madhavi Arora, economist at Kotak Mahindra Bank. Reuters

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