Impact of demonetisation lingers on

Written by Devendra Kumar Pant
Updated: September 2, 2017 9:55 am

GDP growth is on a secular declining path from October-December 2015.

Written by Devendra Kumar Pant

GDP growth in the first quarter of 2017-18, at 5.7 per cent, was way lower than consensus estimates by Reuters (6.6%) and Bloomberg (6.5%). Both supply and demand were impacted due to a combination of demonetisation, implementation of goods and services tax (GST), weak domestic and external demand, and input prices. A much lower growth in April-June 2017-18 than expected suggests that the impact of destocking and slowdown in manufacturing in anticipation of GST has been much deeper than anticipated, and is still playing out. Meaning, domestic demand conditions are still very fragile.


Another factor that did not support growth as anticipated is agriculture, particularly in view of the record foodgrain production in 2016-17. Agricultural growth declined to 2.3% from 5.2% in January-March 2017 and 2.5% in April-June 2016. In view of record foodgrain production, it appears the shortfall is mainly due to the underperformance of allied sectors, namely dairy, fisheries etc.

Also the depressed prices of agricultural commodities adversely impacted agricultural GDP. The first contraction has also taken place in agriculture since July-September 2014, by 2 %, from 7.3 %. This does not augur well for the farm sector particularly when farmer distress is rising. This may put pressure on the other state governments that so far have desisted from announcing farm loan waiver. With several elections due over the next two years, the chorus will only get louder.

As for manufacturing, it was definitely affected by destocking in the run-up to GST, but it positively impacted trade sector growth (11.1%), which has been highest in last five quarters and partly compensated for the downturn in manufacturing growth.

The only bright spot is the barometer of industrial and services activities in the economy, which reversed its four quarter declining trajectory and grew by 5.5% in April-June 2017 from 3.8% in January-March 2017.


The situation from the demand side is equally disturbing. GDP growth is on a secular declining path from October-December 2015. It had declined from 9.1% in October-December 2015 to 6.1% in January-March 2017 and finally to 5.7% in April-June 2017. All components of final demand, whether private consumption, government consumption, investment and net exports, are on a declining trajectory.

Investment growth, albeit at a mere 1.6% in April-June 2017, is a silver lining. Although growth is much lower than same period last year, it has reversed the declining trend since April-June 2016.


Available data points to a lingering impact of demonetisation. All economic data points are from the organised/corporate sector. The unorganised/informal sector was badly impacted by demonetisation and the present data set has not been able to capture its impact. The annual survey of industries will be able to capture the impact of demonetisation on the unorganised/informal sector, but this will come with a lag. The organised/corporate sector depends on the unorganised/informal sector for provision of intermediate goods and services, which are used in final production. The Central Statistical Office is using only the database of the Ministry of Corporate Affairs. The true picture may emerge only after the annual survey of industries results are available.

Currently, the macro environment is stable and conducive for growth, but a number of stress points in the economy such as over leveraged corporates, stressed bank balance sheets, excess capacity in a number of manufacturing sectors and not so bright exports demand are weighing heavily on the growth outlook. Also the ability of fiscal and monetary policy to intervene and provide support to growth is limited. Therefore growth acceleration will be slow and gradual. Besides other policy support, quick resolution of cases referred to NCLT coupled with bank recapitalisation is the way forward to build confidence in the economy.

The golden quadrilateral and highway development programmes launched under former prime minister Atal Behari Vajpayee were one of the reasons for faster growth, while NREGA helped in sustaining rural demand. A faster and effective implementation of affordable housing/housing for all scheme can help economy come out of the current economic situation.

With limited fiscal and monetary space, any big bang stimulus is unlikely. Inflation is expected to breach 4% mark in January-March 2018. In order to match last fiscal’s growth performance (7.1%), the economy has to grow an average rate of 7.6% in next three-quarters, which presently appears to be difficult.

However, all is not lost on the economic growth front. A sharp recovery in the second half of the year can still push economic growth. All eyes now on what the prime minister and team are planning to do.

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