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January 08, 2017

Deceleration time

The Central Statistical Office (CSO) released the first advanced estimates of GDP for this fiscal late last week. It put to rest all speculations and confirmed that the pace of Indian economic growth has slowed this fiscal, which is attributable mostly to the lingering impact of demonetisation, transitory disruptions caused by the implementation of the Goods and Services Tax (GST), and weak agricultural growth.


CSO pegged real GDP growth for this fiscal at 6.5% – not too off from what was widely anticipated – down from 7.1% in last. With this, growth has slowed down for the second consecutive year and is at the lowest level since fiscal 2015.


Gross value added (GVA) growth followed a similar trend, slowing down to 6.1% in this fiscal from 6.6% in last. These estimates imply that real GDP growth would have to swing from 6% in the first half of this fiscal to 7% in the second half. Given the low base and the expected waning of the GST impact going ahead, we retain our forecast of 7.6% real GDP growth in fiscal 2019, with private consumption leading the recovery.


Data readings


  • Real GDP growth is estimated to slow down to 6.5% this fiscal from 7.1% in fiscal 2017. While consumption would continue to spearhead growth, investment is expected move up slowly. Private consumption is estimated to grow at 6.3%, over a high base of 8.7% and remain the largest contributor to GDP (55.7% share). Interest rate reduction, pent-up demonetisation demand, pay commission implementation by the states and moderate inflation are the factors supporting private consumption. Gross fixed capital formation or new investments are estimated to grow by 4.5% this fiscal, up from 2.4% in last, with the help of some push from the government capex and FDI investments. That said, share of investments in GDP declined to 29% from 29.5% last fiscal, suggesting still large underutilised capacities in manufacturing and stretched corporate balance sheets deter private capex revival. Companies prefer to use their profits to pare down the debt rather than invest it.
  • Gross value-added (GVA) growth, which measures the economy from the producer or supply side – and is supposed to be a better measure of economy activity – also indicated a similar trend with real GVA growth slowing to 6.1% this fiscal from 6.6% in last. Here, the services sector acted as the anchor as both agriculture and industry saw their growth declining significantly. Except for the high base of last fiscal, agricultural growth at 2.1% seems to be on the lower side, given that both kharif production and rabi sowing are only marginally lower compared with last fiscal. Manufacturing growth slowed down to 4.6% from 7.9% on account of the disruptions caused by GST implementation and the lingering effects of demonetisation. Services sector, on the other hand, displayed a broad based improvement, with growth improving to 8.3% from 7.7%. Both 'Trade, Hotels, Transport, Communication and Services Related to Broadcasting' and 'Financial Services, Real Estate and Professional Services' are estimated to grow faster this fiscal.