Note ban pulls down economy to 3-year low of 7.1% in FY17; India Inc urges RBI to cut rates

The government's note ban move clearly had a debilitating impact on India's economy, the industry said today, after GDP data showed growth declined to 6.1% in the January-March quarter.

India lost the tag of the world's fastest growing major economy to China with a gross domestic product growth of 6.1% in the fourth quarter. For the full 2016-17 fiscal, GDP growth stood at a three-year low of 7.1%. "For the sake of jobs, we need to get our act together and get the growth momentum in place. There is a call on the RBI to reduce the interest rates and boost confidence. "One only hopes that the impact of demonetization has played out and does not spill into the current financial year," Assocham President Sandeep Jajodia said.

Ficci President Pankaj Patel said the fourth quarter numbers point towards moderation which can be attributed to the ban of high denomination currency notes last year. However, he said the process of remonetisation is almost complete and growth impulse is gradually gaining momentum. Patel said India's economic growth is expected to gather pace in the later part of the current year.

Jajodia said the underlying sentiment needs to improve. Even though the economy would have been remonetised, the manufacturing and other critical sectors would need certain sticky issues like inability of the banks and over-leveraged private sector balance sheets out of the way, before we reach a growth push," the Assocham President said. The government announced the decision to demonetise high denomination currency notes on November 8 last year, banning 86% of the country's cash in circulation.

The bad news of the economy growing at the slowest pace in three years mainly on account of poor performance of manufacturing and service sectors come at a time when the Modi government is celebrating three years in office. The GDP growth in 2016-17 is slowest in two years. It was 8% in 2015-16 and 7.5% in the previous year. The growth for the 2016-17 fiscal has slowed down despite very good showing by the agricultural sector.

China had reported a growth of 6.9% in the January-March quarter of 2017. India had for the first time outpaced China in GDP growth rate in 2015. As per the data released by the Central Statistics Office (CSO), the expansion in Gross Value Added (GVA) during the fourth quarter of 2016-17 fell sharply to 5.6% as compared to 8.7% in the comparable period of 2015-16. For the year as a whole, the expansion in GVA works out to be 6.6%, down from 7.9% a year ago.

The GVA has been declining for the five straight quarters since January-March, 2016. On November 9, 2016, the government had demonetised higher value currency which wiped off about 87% of notes in circulation, leading to a severe cash crunch and disruption in the economic activities.

When asked whether note ban has impacted fourth quarter growth, Chief Statistician T C A Anant said a separate analysis is needed, though he admitted that this was one of the dynamics which might have impacted economic performance in third and fourth quarters. Chief Economic Advisor Arvind Subramanian said demonetization was a "temporary shock" to the economy and "we are seeing this bottoming out as remonetisation progresses".

The construction sector was the hardest hit by demonetization in the fourth quarter and saw a negative growth of 3.7% during the period as compared to 6% in corresponding three months of 2015-16. The CSO said the growth rate declined in manufacturing, mining, trade, hotels, transport, communication, services related to broadcasting, financial, real estate and professional services, both in the fourth quarter as well in the entire year.

The manufacturing sector GVA growth declined to 7.9% in 2016-17 from 10.8% on yearly basis. The mining and quarrying sector witnessed a sharp deceleration to 1.8% from 10.5% in 2015-16. The agriculture sector growth, which accelerated to an impressive 4.9% in the last fiscal from a dismal 0.7% a year ago on account of good monsoon, failed to compensate for decline in other sectors of the economy.

In the fourth quarter itself, the agriculture sector GVA rose by 5.2% as compared to 1.5% in the same period of 2015-16. The data further said the per capita income during 2016- 17 is estimated to have attained a level of Rs 1,03,219 as compared to the estimates for the year 2015-16 of Rs 94,130, showing a rise of 9.7%. Gross Fixed Capital Formation (GFCF) (current prices), a barometer of investments, is estimated at Rs 41.18 lakh crore in 2016-17 as against Rs 40.03 lakh crore in 2015-16.