The fourth quarter GDP figure for 2016-17, at 6.1 per cent, has ‘demonetisation impact’ written all over it; this comes as a marked contrast to the Q3 GDP figures which, by estimating a growth of 7 per cent, came under scrutiny for suggesting that the economy had been unaffected by the huge drop in currency in circulation. Demonetisation appears to have impacted the organised sector, which accounts for three-fifths of the economic output, with a lag. The CSO’s quarterly estimates are based on organised sector data, while informal sector output is arrived at on the basis of extrapolations. In all probability then, the output of the informal sector in the third quarter was overestimated. Economic Survey 2016-17 alludes to this aspect while observing (in contrast to assertions of some finance ministry officials) that the costs of demonetisation have been “real and significant”. Therefore, in Q4, the economy was buoyed basically by government expenditure — not so much agriculture — without which GDP growth was perhaps in the region of 4 per cent. Construction (which actually contracted), finance, insurance and real estate, trade and hotels, electricity, and manufacturing took a hit. A GDP growth rate of 7.1 per cent in 2016-17 is well below 7.9 per cent growth in 2015-16 — this slide seems out of place in a good monsoon year, with agriculture growing 4.9 per cent. Surprisingly, manufacturing shows a growth of 7.9 per cent in 2016-17 — higher than the new IIP series’ estimate of 4.9 per cent. It cannot be reconciled with low bank credit growth either. This once again raises doubts on the accuracy of GDP estimates, which should be sorted out.
The economy is expected to grow 7.5 per cent in 2017-18. Achieving this would require not just spatially and temporally well-distributed rain, but also a strong performance by the informal sector, which accounts for 40 per cent of the GDP and three-quarters of the workforce. It remains to be seen how the pressure of increased compliance under GST, payment of wages by cheque rather than cash and the ₹2-lakh limit on cash transactions will impact the informal sector. Uncertainties in GST, such as the lack of clarity on circumstances under which input credit can be claimed, could hold back investment in areas where the tax rate on output has moved to a higher bracket. Growth is under stress as a result of declining investment rates — from 30.4 per cent of GDP in 2014-15 to 27.1 per cent in 2016-17.
With retail inflation at 3 per cent and few signs of a pick-up in investment, public spending must show the way in 2017-18. The rise in the proportion of government spending from 10.3 per cent of the GDP in 2015-16 to 11.7 per cent in 2016-17 would have to be sustained this year. The Monetary Policy Committee could consider a rate cut when it meets on June 6-7.