Image: Adnan Abidi/ Reuters
The economy could have done with some good news from the Reserve Bank of India (RBI) in terms of a rate cut. But that was not the case. In the Monetary Policy unveiled today, RBI chose to keep the rates unchanged thereby spooking the markets. RBI also confirmed the fears of a slower economic growth. It has lowered the GVA (Gross Value Added) for FY 17 to 7.1 percent from its earlier estimate of 7.6 percent.
This despite a Q2 GDP growth data, which showed that the economy was growing at 7.3 percent (faster than Q1 growth rate of 7.1 percent but slower than 7.6 percent in Q2 of previous fiscal). The demonetisation measures announced by the government on November 8 is casting dark clouds over how much the resultant cash shortage in the economy would hurt Q3 and even Q4 growth.
As it is the Indian economy is being powered by just two of its four engines of growth – consumption and public investment with the other two –exports and private investment, in hibernation. The fear is that demonetisation could kill the third engine of growth – strong consumption.
The Q2 growth got a boost from a better agricultural sector performance thanks to a good monsoon. It grew by 3.3 percent compared to just 1.8 percent in Q1. The hope was that a good harvest will give fillip to rural consumption which could in turn absorb the excess capacity that industry is sitting on leading them to start investing again. But will that happen? The rural economy is far more a cash-based than urban India and it is not clear to what extent economic activity there is affected. Consumption across the country has taken a hit as people held onto their cash even as the government/RBI struggled to replenish the economy with the new Rs 2000 and Rs 500 notes. This will mean that chance of a private investment revival will have to wait.
Nikkei India’s Manufacturing Purchasing Manager’s Index is already showing a decline. It declined from 54.4 in October to 52.3 in November. Experts attribute this to the effect of demonetisation.
Fitch Ratings estimates GDP growth in FY 17 to decline to 6.9 percent from its earlier estimate of 7.4 percent. It said it was revising its growth expectations downwards to reflect temporary disruption in economic activity after the surprise demonetisation of large bank notes. Some like Ambit Capital see a larger slowdown. It expects FY17 second half economic growth to fall sharply to just 0.5 percent and overall FY 18 growth at 5.8 percent.