The calm before the storm

The Central Statistics Office on Wednesday released data that showed the gross domestic product (GDP) grew by 7.3 per cent in the second quarter of the current financial year. Although this is faster than the preceding quarter, the growth is slower than the 7.6 per cent notched up in the same quarter last year. The economy was expected to have turned the corner in the last quarter of 2015-16 with a growth rate of 7.9 per cent, but those expectations were belied when the first quarter underwhelmed with just 7.1 per cent growth. Yet hope floated. The first quarter was seen as possibly the weakest one in the current financial year. With a good monsoon and payout of the Seventh Pay Commission, coupled with the first signs of a consumption surge, it was expected that growth would leap from the second quarter onwards and might just touch that elusive eight-per cent mark. However, that second quarter growth is lower than what was expected is now only a minor worry. The real concern is this growth rate might just be the best that the economy will achieve in 2016-17, thanks to the disruption caused by the demonetisation of high-denomination currency on November 8.

The star of the show in the previous quarter, predictably, was agriculture. Taken together with forestry and fishing, the sector's quarterly gross value added grew by 3.3 per cent. This is not only better than the growth rate of two per cent in the second quarter of 2015-16 but also the best that this beleaguered sector – which has faced two consecutive droughts – has performed in any quarter since the Narendra Modi-led government came to power in May 2014. According to data from the department of agriculture, the production of grain during the kharif season that just ended grew by 8.9 per cent. This is in sharp contrast to a decline of 3.2 per cent during the same period in 2015-16. However, demonetisation has grievously hurt the rural economy, which is heavily dependent on cash. The fate of the farmer has not been as good as that of his trade and the expected surge in consumption due to a good crop is unlikely to materialise because of the liquidity crunch. Another factor that boosted growth was the 20 per cent jump in the central government expenditure. But, here too the cash crunch will play a spoilsport in Q3. 

The slowdown in consumption, both urban as well as rural, is likely to accentuate worries about restarting private investment demand. While manufacturing has grown 7.1 per cent in the second quarter – it is significantly lower than 9.2 per cent growth in the same period a year ago – the worry, just as it was in the previous two quarters, is about the contraction in gross fixed capital formation. This clearly shows investments are shrinking and what makes it worse is there are no other drivers for growth in sight because demonetisation has extinguished any chance of a consumption-led growth invigorating investment. Several brokerages and rating agencies have already lowered GDP growth estimates for 2016-17, which are now closer to seven per cent than to the eight per cent the government hoped it would be. Fitch Ratings, for example, said on Tuesday economic growth would slow down to 6.9 per cent in this fiscal year, scaling down its earlier estimate of 7.4 per cent. The rating agency also revised downwards its GDP growth forecast for 2017-18 to 7.7 per cent from eight per cent. The dim outlook is reflected in the sharp fall in the earnings estimates for Sensex companies. They have fallen by nearly three per cent since the demonetisation announcement with little hope of a revival even in the first quarter of the next financial year.