India undeterred by Modi’s demonetisation; still fastest growing economy with FY17 GDP forecast at 7.1%

Official estimates on Tuesday showed that there would be no impact of demonetisation on India’s economy with the Central Statistics Office keeping its current financial year’s growth forecast at 7.1%. With the forecast, India will continue to be the fastest growing major economy. The FY17 growth forecast still marks a slump against the 7.9% growth in the last financial year 2015-16.

CSO also estimated the GDP growth in the fiscal third quarter October-December at 7% on-year, slower than the previous quarter’s 7.3% on-year.

Why so serious?

If economists are to be believed the slight slowdown will likely be over soon with most projecting a sharp recovery over the next two financial years, as the country reaps gains of the note-ban with more commercial activity getting formalised.

The reputed Paris-based think-tank OECD (Organisation for Economic Cooperation and Development), which earlier today cut India’s growth forecast to 7% for 2016-17 in view of demonetisation, also supported India’s move to demonetise high value currency notes, saying that in long term its effect would include important gains going forward.

OECD also said the pace of India’s GDP growth will accelerate to 7.3% in the next fiscal. The organisation forecast the country’s economic growth to rise further to 7.7% in 2018-19.

First impact

Earlier on January 6, the CSO had released its first advance estimate of India’s GDP for the current fiscal at 7.1%, but had not taken into account the slowdown seen in November citing high volatility in the figures.

Releasing the data compiled by the CSO in January, Chief Statistician TCA Anant had then said the figures for November were available and examined, but “it was felt in view of the policy of denotification of notes that there is a high degree of volatility in these figures and a conscious decision was taken not to make projection using the November figure”.

This year has been unusual for the CSO as it had to release the advance estimates of GDP about a month earlier than the general practice of doing so on February 7 in view of early presentation of the Budget. Accordingly, the First Advance Estimates of National Income, 2016-17, did not take into account the impact of demonetisation.

Looking up

A number of think-tanks and experts have cut their projections for 2016-17 to even below 7.1% estimated by CSO in January, but most have predicted a healthy recovery in the next two financial years.

The Reserve Bank of India cut its GDP growth forecast for this fiscal to 6.9%, but at the same time, projected a rebound in the next fiscal at 7.4%. Earlier this month, the International Monetary Fund in its annual report on India had forecast that the GDP growth will slow to 6.6% in 2016-17 due to “temporary disruptions” caused by demonetisation, but also said it will bounce back to its expected growth of more than 8% in the next few years.

However, amid all the optimism, there might be a slight cause for concern. Earlier last month, Chief Economic Adviser Arvind Subramanian said the official GDP figures may not fully reflect the “real and significant hardships” experienced by the informal sector, which employs about nine out of 10 workers in India.

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