Demonetisation, GST effects: GDP growth seen at 4-year low of 6.5%

Economic growth in 2017-18 is estimated to slow to a four-year low of 6.5 per cent, against 7.1 per cent in 2016-17. This will be the lowest growth rate under the BJP-led National Democratic Alliance, largely because of the adverse impact of the goods and services tax (GST) and the lingering effects of demonetisation.

The first Advance Estimate for India’s GDP growth released by the Central Statistics Office (CSO) on Friday showed that the pace of agricultural expansion is expected to fall by more than half (from 4.9 per cent in the previous year to 2.1 per cent in FY18) due to decline in kharif output year-on-year. The data also showed massive rural distress as the agricultural output inflation rate (measured by GDP deflators) is expected to fall to 0.7 per cent against 4.1 per cent over this period, a development that may set the direction for the Budget, which is less than a month away.

The overall GDP growth rate is not only projected to be lower than what was forecast by the Economic Survey in the range of 6.75-7.5 per cent, but is also just a shade higher than the 6.4 per cent registered in 2013-14, one of the two years known for the so-called policy logjam in the previous United Progressive Alliance regime.
However, it is much higher than the 5.5 per cent in 2012-13, a year known for policy paralysis.
With this, India might lose the tag of being the fastest-growing large economy to China if projections of the International Monetary Fund come true. The IMF has forecast China will grow by 6.8 per cent in 2017.
Growth in gross value added (GVA) is projected to fall to 6.1 per cent in FY18, much lower than the RBI’s forecast of 6.7 per cent. GVA had risen 6.6 per cent in the previous year.
The GST not only impacted manufacturing in the second quarter of FY18, when it was rolled out, but also in the first quarter due to pre-implementation jitters.
The GST also impacted net taxes as these are projected to grow only 10.9 per cent in the current financial year against 12.8 per cent in the previous year. The GST Council had cut rates for over 200 items in October and November, which might impact collections.
The impact of demonetisation, at least in the first quarter, compounded the woes of manufacturing, which is projected to witness a growth rate of just 4.6 per cent in the current year against 7.9 per cent in the previous year.
However, investment seems to be reviving a bit with gross fixed capital formation forecast to rise by 4.5 per cent against 2.4 per cent.
Services are also projected to go higher even as growth in government-backed public administration, defence and others is pegged to fall by 9.4 per cent against 11.3 per cent in the previous year. This means the government is controlling its expenditure to rein in the fiscal deficit, which has crossed the Budget Estimates by November itself. This dimension was also shown by government final consumption expenditure, which is projected to fall by more than half.
Source:http://www.business-standard.com/article/economy-policy/demonetisation-gst-effects-gdp-growth-to-fall-to-6-5-for-fy18-118010501096_1.html
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