The country's economic growth is officially projected to fall to the lowest rate of 6.5% in the Modi government for 2017-18 against 7.1% in the previous year due to manufacturing getting impacted by disruptions caused by the goods and services tax (GST) and lingering impact of demonetisation, at least in the initial months.
The pace of agriculture expansion is to fall by half due to decline in kharif output year-on-year. In fact, the data released by Central Statistics Office (CSO) on Friday showed massive rural distress as food inflation (measured by GDP deflators) are expected to fall to 0.7% against 4.1% over this period, a development that may set the direction for the Budget which is less than one month away for presentation in Parliament.
The overall GDP growth rate is not only projected to be lower than forecast by the Economic Survey in the range of 6.75-7.5%, but is also just a shade higher than 6.4% registered in 2013-14, one of the two years known for the so-called policy log jam in the previous united progressive alliance regime.
However, it is much higher than 5.5% in 2012-13, a year also known for policy paralysis under the previous government.
With this, India might lose the tag of fastest growing large economy to China, if IMF projections come true. IMF has forecast China to grow by 6.8% in 2017.
GST not only impacted manufacturing in the second quarter of the FY18 when it was rolled out, but also in the first quarter due to pre-implementation jitters. It also impacted net taxes as these are projected to grow only 10.9% in the current financial year against 12.8% in the previous year. The GST Council had cut rates on over 200 items in October and November which might impact the collections, coupled with compliance issues.
The lingering impact of demonetisation, at least in the first quarter, augmented the hit on manufacturing, which is projected to witness a growth rate of just 4.6% in the current year against 7.9% in the previous year.
However, investment seems to be reviving a bit with gross fixed capital formation forecast to rise by 4.5% against 2.4%.
Services are also projected to go higher even as growth in the government-backed public administration, defence and others pegged to fall by 9.4% against 11.3%. This means that the government is controlling its expenditure to rein in fiscal deficit which has already crossed the Budget Estimates by November itself. This dimension was also shown by government final consumption expenditure which is projected to fall by more than half (see chart).
The other two segments of the services, including financial services, are to grow higher.
However, none of the segments is projected to grow in double digits in the current financial year. The same was the case in the previous year, barring the government-supported services.
The GDP growth is projected to accelerate to 7% in the second half of the current financial year from 6% in the first half. GDP had grown just 5.7% in the first three months of the current financial year due to pre-GST nervousness coupled with fading impact of demonetisation and 6.3% in the second quarter.
In fact, chief statistician TCA Anant said that the GDP growth would remain above 7% from the fourth quarter of the current financial year onwards.
Aditi Nayar of ICRA expected advance estimates to be under-estimating the growth as it does not have full year data. She said,"We continue to expect GVA and GDP growth to print at 6.5% and 6.7%, respectively for 2017-18."
Advance estimates were used to be released in the first week of February before 2016-17, but these come earlier now as the Budget presentation was advanced. As such, CSO has actual GDP data of the first half, the index of industrial production figures for October, export figures for November and first advance estimates of Kharif. Most of the figures for the second half are projections.
However, Ranen Banerjee, partner - Public Finance and Economy, PwC India, said if the economy grows at 6.8 percent in Q3 and 7.2 percent in Q4 supported by base effects, advance estimates would be achieved. "Crude prices could be the only story spoiler!” he said.
The advance estimates are used for calculating various budget numbers including tax receipts, fiscal deficit etc. The
Budget for 2018-19 will assume a specific growth over the nominal GDP of Rs 166.27 trillion projected for the current financial year. The advance estimates projected the economy to grow by 9.5% against the Budget assumption of 11.7%.