Finally, we have the numbers we have been waiting for. The latest GDP estimates are out, showing how the Indian economy steadily decelerated through the past year – a slide that got only worse with demonetisation. For the full year ended March 31, economic growth slowed to 7.1 per cent from 8 per cent a year earlier, and slipped sharply to 6.1 per cent in the January- March quarter – the slowest in 13 quarters. The numbers vindicate what critics of demonetisation had predicted. These also deflate the government’s claim that the economic pain from its November 8 decision to scrap high-value currency notes would be temporary, with limited impact. Yet, most policymakers continue to be in denial.
Sample this: The government’s chief statistician, TCA Anant, refused to link the slowdown through the third and fourth quarter to demonetisation that brought widespread economic disruptions and sharply depressed both consumption and investment demand, with sectors such as construction and retail sales being the worst hit. Arvind Subramanian, the government’s chief economic adviser, said he thinks the worst is over. Finance minister Arun Jaitley argued what happened over the last two quarters of 2016-17 was more of an extension of the deceleration that had already set in from July.
I sincerely hope they do not believe in what they have said – that they have been forced by their occupational hazards to make these comments. A closer scrutiny of the estimates points to a scenario that is more worrying than what the headline numbers would suggest.
The growth in gross value added (GVA), which factors out indirect taxes from estimating the value of GDP and is seen as a more appropriate measure of economic expansion, was 5.6 per cent in the fourth quarter. The frequent revisions in excise duties on fuel and fuel products, which we saw through 2016-17, explain why GDP growth in the quarter turned out to be a half percentage point higher than the growth in GVA.
Further, if the impact of government spending and agriculture is factored out, the growth of GVA for the rest of the economy turns out to be just 3.8 per cent in the January-March period. The corresponding figure in the same quarter a year ago was 10.7 per cent. In other words, the deceleration in the sectors that the economy leans on for jobs and sustainable growth was much sharper than what we see in the headline GDP numbers. The construction sector, hardest hit by the note-ban decision, contracted; financial services grew just 2.2 per cent and growth in mining slowed sharply.
All of these explain why the news of unemployment has returned to make headlines. Ironically, many of the victims continue to support demonetisation, with the hope that it would weed out corruption, destroy black money and help script a better future for them. The numbers we have now do not present a rosy outlook for the immediate future, however.
The most worrying pointer from the latest GDP data relates to investment demand. It slipped sharply through the year to end with a 2.1 per cent contraction in the last quarter, underscoring an environment of fast-eroding business confidence and shrinking opportunities to find and deploy new capital.
To say that the worst is over would not only be naive, but disastrous in its consequences. Make no mistake, even the sustained rally in the stock market should not be construed as evidence of either improving sentiments or the fundamentals getting better. The Sensex has been rising because of expectations that the Reserve Bank of India would cut interest rates on the back of moderating inflation, that the monsoon will be good enough to spur demand and that the government will finally resolve the long-pending problem of bad loans. It is also hoped that the goods and service tax (GST) will be a game-changer.
As of now, these are hopes and expectations, and just that. There is little on the ground to suggest things will turn around soon. If anything, come July 1, we might see yet another disruption, when GST rolls out.