The Big Story: Hard work

The other shoe seems to have finally dropped. When Gross Domestic Product growth figures for the third quarter (October-December) of Fiscal Year 2016-’17 seemed to suggest that demonetisation had not affected the economy, Prime Minister Narendra Modi mocked economists, claiming that India’s people knew the difference between Harvard and hard work. Apparently both do not have to be mutually exclusive. Figures released by the Central Statistics Office on Wednesday suggested that India’s economy, touted to be the fastest growing worldwide, is skidding.

Numbers for Q4, January-March, were particularly dire. A poll of economists surveyed by Reuters ahead of the data had estimated the Q4 figure would be 7.1%, faster than the 7% clocked in Q3, and also ahead of the 6.9% recorded by China in the same period. Estimates ranged from 6.5% to 7.8%. The first estimate from the Central Statistics Office, however, has put the number much further behind at 6.1%. A more careful look at the details suggests even more cause for concern. Gross Value Added growth, the largest component of the headline GDP number, dropped to 5.6% from 8.7% in the same period last year. Removing “public administration, defence and other services”, the portion of the data referring to government expenditure, the Q4 Gross Value Added growth number comes down to 4.1%.

Clearly, demonetisation has had its impact. Investment demand fell into negative territory. Industry growth for Q4 dropped to 3.1% from the 6.2% it had clocked in Q3. Construction activity was also in the red, at negative 3.7% year-on-year, compared to 3.4% in the previous quarter. But demonetisation is not the only story here. Economic growth has now fallen for three quarters consecutively, including one quarter – July-September 2016 – that was completely unaffected by Modi’s note ban move, which was announced in November. The first GDP estimate for the entire fiscal year is 7.1%, down from 8% the previous year. And this was in a year with a good monsoon.

Demonetisation was such a massive shock to the system that most analysis has been focused on figuring out how it affected India’s economy, especially because official GDP numbers can only estimate what has happened in the informal sector that was hardest hit by the note ban. This was even more so because the third quarter’s results were perplexing, since they did not seem to show any effect of demonetisation. Now it is clear that Modi’s massive effort has hit the economy hard.

But the bigger picture is also troubling. Three consecutive quarters of slowing growth, with Q4 even putting India behind China, and it is now likely that the first quarter of FY2017-18 will also feel the note ban impact. This suggests India cannot get by just having weathered the demonetisation storm. Instead, the economy needs the government’s promises of Modi’s move leading to huge growth to come true. Supporters of the move have been promising a “V-shaped” recovery – a big dip followed by a huge jump – for some time now, but too big a dip could scare off investment and make the uphill climb that much harder. And this year’s budget did not offer any major sops from the government that could make up for how badly demonetisation hurt the economy.

The government’s other big move, the Goods and Services Tax, has also been touted as an effort that will lead to GDP growth, but that will not come immediately. Indeed, it is likely that economic activity will be affected as the move is rolled out across the country, starting July. The one bit of good news is that the Met department expects this year’s monsoon to be normal. With the economy headed onto a slippery slope, India desperately needs that prediction to come true.

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