Q4 GDP Growth

It looks more like a temporary weakness than a structural problem…

The GDP estimates released for the fourth quarter of 2016-17 and for the full fiscal year have come in lower than expected. While the quarterly GDP growth came in at 6.1%, the full year GDP came in at 7.1%. A cursory look at the underlying data suggests that this could be more of a temporary weakness in data rather than any clear structural problem. Here are four reasons why…

Lag effect of demonetization…

Prima facie, this looks the lag effect of the demonetization exercise undertaken by the government last year. The March quarter was the first full quarter of remonetization and we may have to give it a couple of quarters more for the pick-up in growth to show up. However, greater digitization and a pick-up in corporate lending will give a boost to the GDP in the coming quarters. After all, even Moody’s is confident of 7.5% full year GDP growth in this fiscal.

Government is spending…

The saving grace to the Q4 GDP has come from government services like welfare, public services, administration and defence. That means; the government is doing its bit to provide the fiscal stimulus to the economy. Even the sectors that are doing well are the sectors where the government has extended support; like coal, steel and fertilizers. That promises to turn around the economy in fiscal year 2017-18!
Urban and rural consumption…

One can argue that Gross Capital Formation (GCF) has slowed in this quarter but that was always expected. The good news is that consumption demand has only fallen marginally. That means the core story of consumption is still intact in India and that can drive up demand. Agriculture is another area where we have seen 5.3% growth compared to 1.5% in the Q4 of previous year. Robust growth in agriculture coupled with higher farm incomes bodes well for a pick-up in rural demand. Therefore the consumption story appears to be intact and that could support the revival in growth.

Financials and construction…

If you look at the sectoral break-up of the GDP growth, the real pressure on the GDP has come from financials and construction. Both these sectors were the worst hit by demonetization. Construction slowed as the government clamped down on black money and cement demand slackened due to weak last-mile demand. Additionally, financial sector demand also got hit by the tight cash situation and the weakness in last-mile delivery. While the financial sector slowed down, construction dipped into negative territory. In a nutshell, the Q4 impact of GDP appears to be temporary. With the lag effect of demonetization ebbing, we can look forward to a sharp recovery in the next quarter!