India’s Q2 GDP grows; cash crunch clouds outlook


India’s economy witnessed a marginal acceleration in the second quarter of FY 2016-17, upholding its ranking as the world’s fastest-growing economy. But Asia’s third biggest economy may not be able to retain that title for long as demonetization by Prime Minister Narendra Modi’s government is expected to stutter the revival.


According to the data released by the Central Statistics Office (CSO), Gross Domestic Product (GDP) in India expanded by 7.3 per cent in the July-September2016 quarter compared 7.1 per cent growth recorded in the previous quarter.


The economists expect that growth will suffer a setback in the second half of the year on account of lower consumption caused by an economy-wide cash-crunch following the unexpected ban on Rs 500 and Rs 1,000 currency notes. This will make the government’s target of surpassing last year’s 7.6 per cent growth this year hard.


Recent reports suggest that cash crunch has already started hitting several industries badly leading to cut in production and subsequent fall in sales. Most of the experts believe that things on the ground are unlikely to improve much in the next few quarters with threat of massive job losses looming large at several small and medium enterprises.

The slight surge in GDP growth in the second quarter was supported by agriculture sector which spiked at 3.3 per cent over 1.8 per cent in the April-June quarter. The keenly tracked manufacturing growth output eased to 7.1 per cent in the quarter under review against 9.1 per cent registered in the first quarter of 2016. Also, mining output contracted 1.5 per cent against 0.4 per cent growth in the last quarter. Further, electricity, gas, water supply growth slowed to 3.5 per cent from 9.4 per cent.


Investments emerged as the big concern with gross fixed capital formation declining 5.6 per cent in the July-September quarter, and a further knock from demonetisation is very likely. However, in the long-run demonetisation is expected to support growth capital.


Going forward, the declining growth combined with an expected drop in inflation, owing to a healthy monsoon season and declining food prices, could motivate the monetary policy committee (MPC) to slash the policy rate by 25 basis points at its scheduled meeting next week.