The gross domestic product growth of the country fell to a four-quarter low of 6.1 per cent in the fourth quarter (Q4) of the financial year 2016-17 (FY17), primarily because of demonetisation adversely affecting economic activity.
Prime Minister Narendra Modi had announced the banning of the old Rs 500 and Rs 1,000 notes on 8 November last year. This had primarily hit activity in the informal sector.
The effect of the note ban was evident in the growth figures. Agriculture was the only bright spot among sectors; government expenditure also increased. However, without indirect taxes, growth figures would be more dismal.
Growth in gross value added (GVA), the difference between GDP and indirect taxes, was only 5.6 per cent — the lowest in at least eight quarters, according to official figures released on Wednesday.
Economists now expect the Reserve Bank of India (RBI) to cut the repo rate in its monetary policy committee meeting next week.
The most discernable impact of the slow growth was in the private sector — without agriculture and government expenditure, GVA growth was only 3.8 per cent in Q4 FY17. In Q1, it was 8.4 per cent, and in Q3 — the quarter in which demonetisation occurred — it was 5.9 per cent.
In FY17, the economy grew by a three-year low of 7.1 per cent — the same as two Advanced Estimates pegged it at in February. GVA growth for the year was 6.6 per cent, also the slowest in three years and a tad lower than the second Advanced Estimate of 6.7 per cent. For the second half of the year, GVA growth excluding agriculture and government spending slowed down to 4.8 per cent, down from 7.6 per cent in the first half.
Demonetisation adversely impacted construction and financial services, according to experts.
“These sectors are generally stable and robust, but were adversely impacted by demonetisation,” said D K Srivastava of EY.
He added financial services catering to informal sectors slowed down in credit growth, and the economy would take at least another quarter to recover from the impact of demonetisation.
However, Chief Statistician T C A Anant claimed the impact of the note ban was far more complex. “Determining how a particular policy — from the web of policies — affects growth is a complex task,” he said.
The impact of demonetisation on investments was also evident in the gross fixed capital formation (GFCF) figure — its growth fell by 2.1 per cent in Q4 FY17. Before the note bank, GCFC grew 3 per cent in Q2 and 7.4 per cent in Q1.
Government expenditure, on the other hand, rose 31.9 per cent in Q4 FY17; in Q3, it was 21 per cent. In Q1 and Q2, it was about 16.5 per cent.
Private consumption expenditure, denoting demand, grew by 7.3 per cent in Q4, against 11.1 per cent in the previous quarter. The bump in the third quarter was because of significant purchases with old notes shown in some sectors. In Q2, it had risen 7.9 per cent, and in Q1, 8.4 per cent.
Soumya Kanti Ghosh, chief economic adviser, State Bank of India, said the RBI would now have to take a look at the figures. He said the RBI had claimed the economy would recover in Q4, but the narrative had now changed.
Ghosh pointed out manufacturing growth rose 10.7 per cent in Q1, but fell to 5.4 per cent in Q4.
The figures released on Wednesday factored in the new series of the Index of Industrial Production (IIP) and the wholesale price index (WPI).
It was expected the new series would boost GDP growth, but that did not happen. Quarterly figures, however, changed substantially. Earlier estimates had pegged Q1 manufacturing growth at 9 per cent.