Demonetisation, GST hits GDP; 3-year low

New Delhi: India's GDP growth in April-June (first quarter of 2017-18) slowed sharply to a three-year low of 5.7 per cent as the manufacturing sector got hit due to pre-GST jitters and demonetisation. For the second straight quarter, therefore, India's growth lagged behind China.

India's GDP growth has decelerated in every quarter since at least over a year. It fell from 7.9 per cent in April-June 2016-17 to 7.5 per cent in July-September 2016-17, to seven per cent in October- December 2016-17, and further to 6.1 per cent in  January-March 2017.

This shows the challenge before the Narendra Modi government to restart the growth momentum in the country.

Finance minister Arun Jaitley admitted on Thursday that the 5.7 per cent GDP growth in first quarter of 2017-18 was a "matter of concern". He said the manufacturing growth rate had bottomed out, as GST has been implemented and destocking of pre-GST stocks is almost complete. "With GST now being operationalised, this would bottom out as far manufacturing is concerned and probably the curve could turn up," he added.

In contrast, China recorded a 6.9 per cent growth in the January-March as well as the April-June quarters.

Manufacturing sector growth fell sharply to 1.2 per cent in April- June 2017-18, down from 10.7 per cent a year ago. 

 This is likely because businesses focused more on clearing inventories rather than production ahead of the July 1 launch of GST. The agriculture sector growth has slowed down marginally to 2.3 per cent in 2017- 18's first quarter compared to 2.5 per cent in a similar period last year. Construction sector growth too slowed down to two per cent in the first quarter of 2017-18, against 3.1 per cent in the same period in the previous year.

The Indian economy had grown by 7.1 per cent in 2016-2017. GDP had grown by eight per cent in 2015-16, 7.5 per cent in 2014-15 and 6.4 per cent in 2013-14, according to the new series.

Rating agency ICRA's principal economist Aditi Nayar said that India's GDP was unlikely to grow beyond seven per cent in 2017- 18 after the bleak first quarter readings. "The pace of growth of industry and agriculture were lower than anticipated, whereas service sector growth exceeded our forecasts. The combination of lower volumes and higher discounts offered to reduce inventories ahead of GST, and the turnaround  in average WPI inflation, weighed upon manufacturing growth in the first quarter of FY2018," she said. Ms Nayar added that the lingering impact of demonetisation, and effect of RERA was visible in the low two per cent growth of the construction sector.