GST impact: 6.5% GDP growth rate in FY18 may force India to let go of being fastest-growing economy tag to China

The GDP advance estimates for fiscal year 2017-18 were revealed on Friday. Economic experts were watching the numbers closely as they hold high importance because the data published by the Central Statistics Office (CSO) were the first official full-year growth estimates after the roll out of the Goods and Services Tax Bill (GST). 

According to the numbers that were impacted negatively by the GST Bill implementation, the growth estimate for FY18 at 6.5 per cent has become the lowest in four years. For the previous fiscal, it was at 7.1 per cent. 

Releasing its first advance estimate for the current fiscal, CSO stated that the speed of agricultural sector would be trimmed. Reducing its forecast it said that the farm sector would grow at 2.1 per cent in comparison to the 4.9 per cent in 2016-17. The reason behind the low estimate is decline in kharif output year-on-year.

In September quarter, the economy expanded by 6.3 per cent, after nosediving to a three-year low of 5.7 per cent GDP growth in the June quarter after being impacted by the roll out of  the goods and services tax (GST) and the lingering effect of demonetisation could also be seen on the projection.

The data also showed that the agricultural output inflation rate is also expected to fall to 0.7 per cent against 4.1 per cent over this period, an indicator that might impact the Budget, which will be tabled on February 1. 

The rolling out of GST not only impacted manufacturing in the second quarter of FY18, when the Bill was implemented but also in the first quarter due to pre-implementation worries.  Another negative impact of GST was on the manufacturing sector, about which the CSO projected that it would grow at 4.6 per cent in 2017-18, compared to 7.9 per cent in 2016-17.  

The GST also impacted net taxes as these are projected to grow only 10.9 per cent in the current financial year against 12.8 per cent in the previous year. 

The overall GDP growth rate projected was lower than what was forecasted by the Economic Survey in the range of 6.75-7.5 per cent and this gives a reason to analysts for believing that because of these statistics and the fact that if projections of the International Monetary Fund come true,  India might lose the tag of being the fastest-growing large economy to China. 

The IMF predicted that China would grow by 6.8 per cent in 2017.

However, what might bring some relief to Indian economy is a report by Reuters that quoted sources saying that China would keep its target for economic growth at "around 6.5 per cent in 2018, unchanged from last year. The reason behind which is that China sought to balance efforts to reduce debt risks while keeping the world’s second-largest economy stable.

But coming back at home, Chief Statistician TCA Anant's hopes might give another reason to cheer up Indian economy experts.

TCA Anant said GDP growth would remain above 7 per cent from the fourth quarter of the current financial year. 

Economic Affairs Secretary Subhash Chandra Garg said: "GDP growth of 6.5 per cent for 2017-18 implies growth of 7 per cent for the second half. This confirms a strong turnaround of the economy. Investment growth of almost twice of last year indicates investment reviving."

But defending the government, Bibek Debroy, Chairman, Economic Advisory Council to the Prime Minister (EAC-PM) has said on Saturday, "India's advance GDP growth estimate of 6.5 per cent for this fiscal shows reform measures taken by the government is yielding results and growth will accelerate to over 7 per cent in 2018-19."

Economic growth in the third and fourth quarters of the current fiscal will be better than the first half of this financial year, he said.

"Advance GDP growth estimate of 6.5 per cent shows that the reform measures undertaken by the government are yielding results, because 6.5 per cent for the full year means that Q3 and Q4 numbers will be far better than first half of the year.

Q3 numbers should be higher than 6.5 per cent and Q4 numbers will be close to 7 per cent," Debroy said. 

However, Congress mocked the Government over CSO projections. The Congress accused Prime Minister Narendra Modi and Finance Minister Arun Jaitley of ignoring economic wisdom and causing a "catastrophic" blow to India's growth story.

Party communication in-charge Randeep Surjewala claimed that the double whammy of "Modi Made Disaster of Demonetisation" and the implementation of a flawed GST were responsible for the economy's downturn.

"An arrogant Prime Minister Narendra Modi and a failed Finance Minister Arun Jaitley, hell bent upon ignoring economic wisdom, have dealt a catastrophic blow to India's growth story as proved by the latest GDP estimates slumping from 7.3 per cent to 6.5 per cent," he said.