Two jolts for the Narendra Modi government on the economy front in as many days. First RBI annual report showed that the bold move of demonetisation did not go for the Modi government as planned. And, yesterday, the official GDP data showed that growth rate declined to 5.7 per cent for the April-June 2017 quarter. It was 7.9 per cent the corresponding quarter last fiscal.

Though, decline in growth rate was being speculated post-demonetisation, the government maintained that it would not affect the growth rate much. Former Prime Minister Manmohan Singh had predicted a decline of two per cent in the GDP growth rate figures following demonetisation. The decline in GDP growth figures has bettered his prediction.

GDP DECLINES FOR 6TH STRAIGHT QUARTER

By the end of 2015, India had emerged as the fastest growing world economy overtaking China. In the first quarter of 2016 - January-March period - the GDP growth rate was nearly 9.2 per cent. This gave rise to aspiration that India might actually attain a double-digit growth rate.

But, since January-March 2016 quarter, the GDP growth rate has been continuously declining. In April-June 2016 quarter, GDP growth rate slipped to 7.9 per cent - a decline of 1.3 per cent over the previous quarter. It dropped further to 7.5 per cent in the quarter ending September 2016. Demonetisation was yet to be announced.

Demonetisation hit the nation on November 8 mid-way through the September-December 2016 quarter, which saw GDP growth rate slipping to 7.0 per cent. Post-demonetisation, the first quarter of January-March this year registered 6.1 GDP growth rate - a sharp decline of nearly 3 per cent year-on-year basis.

Taking to twitter noted economist Ajit Ranade writes, "1 per cent lower annual GDP growth = loss of 1.5 lakh crore national income and loss of millions of jobs."

Ranade also wonders why despite "conducive" macro-economic factors including low inflation, manageable fiscal deficit, stable rupee, plenty of forex, record inflow of foreign investment, low oil prices, the country recorded GDP growth of 5.7 per cent in the April-June quarter.

ARE THESE FIGURES FINAL?

The latest GDP growth data is not the final one as it will be adjusted over next couple of years. It does not factor in the data from unorganised sectors which were hit hard by demonetisation.

Unorganised sectors constitute about 45 per cent of Indian economy. Collecting data from unorganised sectors takes time upto two-three years. Only after that the real GDP figures would be available. Given the shock that demonetisation gave to the unorganised sectors, the GDP figures are likely to go further down.

MANUFACTURING DECLINE AND GST

The manufacturing sector has hit the lowest growth rate in five years. The manufacturing sector reported growth rate of 1.6 per cent compared to 3.1 per cent in the previous quarter.

Decline in the manufacturing is being attributed to the Goods and Services Tax (GST) reform. The government had announced several months in advance that the GST would be implemented from July 1. This was done to smoothen the transition process but this resulted in most manufacturers de-stocking during period April-June.

Consequently, trading went up during the period as sales flew north on the account of discounts. But, during April-June, mostly stocks were cleared. New manufacturing was not carried out.

CAPACITY UTILISATION DECLINED

Besides the pre-GST production paralysis in the sector, manufacturing also suffered from declining capacity utilisation. An RBI report, released in March this year, had indicated what was in store for the manufacturing sector.

Capacity utilisation is understood as a measure of the extent to which productive capacity of a business is used. It is the percentage of total capacity of the business entity actually achieved over a given period of time.

The RBI report (March, 2017) stated that the average quarterly capacity utilisation rate was at 71 per cent for the previous three quarters. The capacity utilisation was calculated on the basis of production output of around 1,300 manufacturing firms - of which 952 were either owned by the government directly or through majority share in the PSUs.

The capacity utilisation figure was a sharp decline over five year. It was 79 per cent in the two years to fiscal year 2012. This dropped further over next two years to an average of 74 per cent by FY14. And, now it is just around 70 per cent.

A decline in capacity utilisation leads to dwindling investment, which brings slowdown. The same was witnessed in several sectors.

DECLINING DEMANDS, RISING NPA

Decline in manufacturing also reflects decline in demand in the domestic and foreign markets. Though, Finance Minister Arun Jaitley yesterday expressed hope that the annual GDP growth rate would be around 7 per cent. Jaitley referred to revival signals in the international markets, where demands have shown a rise.

Decline in domestic demand is accompanied by rise in NPA - the non-performing assets. Both the banks and the companies have reported rise in assets which have turned loss-making. This is corroborated by the decline in borrowing by the companies.

The credit take-off has been in over 20 years. According to the RBI annual report, released on Wednesday, the non-food credit off-take reached a low of 5.8 per cent at end-March 2017, the lowest since 1994-95. Some reports say that overall credit offtake for July, 2017 was negative.

The credit offtake scenario reflects that the industries are not sure about the future trends and consider any big investment in production as "not safe" on weak demands.

DISCIPLINED GOVERNMENT SPENDING

In order to manage fiscal deficit, the government has been focusing on reducing public expenditure. But, this has resulted in overall decline in investment. Private investment has also taken a hit on weak market indicators.

Some reports suggest that the investment rate in India is at the lowest in 10 years. Low investment has hampered the growth of infrastructure, transport, health and transport sectors, which are biggest job providers. Following demonetisation, loss of employment was a major concern.

According to some estimates, demonetisation affected the unorganised sector growth rate by upto 80 per cent, also resulting in loss of lakhs of jobs. Disciplined public expenditure by the government, apparently for the fear of credit rating agencies, has complicated the matter further.

The immediate indicators of economy leave no doubt that the country is heading to another phase of slowdown. But, with Lok Sabha elections less than two years away, public expenditure is likely to see a massive increase.

A push to infrastructure, health, education, transport and manufacturing sectors is expected in the coming months. Finance Minister Arun Jaitley may have placed his hope of 7 per cent GDP growth rate on expected public spending.

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