GDP surprises, grows 7% in Oct-Dec; full year estimates at 7.1%

The Indian economy grew at a slower 7 percent in October-December, from 7.4 percent in the previous quarter and 7.2 percent the same period of the previous year, government data showed on Tuesday, somewhat confirming deceleration fears caused by an economy-wide cash-crunch, but not quite to the extent most analysts had projected. The data, put out by the Central Statistics Office (CSO), also projected that the economy will likely to grow at 7.1 percent in 2016-17, 0.8 percentage points slower than the previous year’s 7.9 percent
expansion, mirroring demonetisation’s effect on household spending and corporate investment. The first estimates released in January projected that India would grow 7.1 percent in 2016-17 from 7.9 percent in the previous year. These were based on incomplete corporate income and factory output data and did not fully factor in the effects of demonetisation. While there were signs of slide in consumer goods sales and muted investment activity because of the cash crunch, the CSO did not revise downwards India’s GDP growth in its second advance estimates on Tuesday. Demonetisation’s worst effects has probably been reflected in the October-December GDP growth figures as it factors in the 50-day currency recall period from November 8 to December 31. 



  • Many analysts had projected that GDP growth in this quarter will moderate sharply to below 6 percent, pulling the overall annual GDP growth rate. 
  • While India remains the world’s fastest growing major economy ahead of 6.7 percent growth in China that is battling an industrial deceleration, question marks have been raised over its ability to hold on to that status following the demonetisation drive. 
  • The move has hurt household spending on aspirational and essential products have been the edifice of the India growth story. 
  • The “demonetisation” of Rs 500 and Rs 1000 notes has also dampened consumer durable sales in rural areas where most transactions take place in cash, partially offsetting the gains from abundant summer rains this year after two years of successive drought. 
  • The demonetisation has also upset families’ spending plans on cars, televisions and refrigerators that peak during the wedding season during October-March. The manufacturing sector grew 8.3 percent during October-December, from 12.8 percent in October-December 2015-16 and 6.9 percent in July-September 2016-17, reflecting the poor consumer durables output and sales in the last few months following the outlawing of high denomination currency notes and restricted access to cash. 
  • In the full year for 2016-17, the CSO has forecast that the manufacturing sector will grow at 7.7 percent from 10.6 percent in 2015-16. India’s factory output measured by the index of industrial production (IIP)-- closest approximation for measuring economic activity in the country’s business landscape-- already contracted (-) 0.4 percent in December from a growth 5.7 percent in November indicating signs of faltering industrial activity because of demonetisation. 
  • Good rains this year have likely helped in raising farm income. Agriculture is set to grow at 4.4 percent this year, compared to 0.8 percent in the previous year. Part of this expansion, however, can also be due to a low base-effect—a statistical phenomenon that magnifies small changes. India was hit by two successive droughts in the last two years.

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