India: Growth nosedives at the end of FY 2016 following demonetization
May 31, 2017
The Indian economy slowed sharply at the end of FY 2016 as an unfavorable base effect and demonetization spillovers hit growth. According to recently released data by the Ministry of Statistics and Programme Implementation (MOSPI), GDP expanded a moderate 6.1% annually in Q4 FY 2016, sharply below the 7.0% increase in Q3 and the worst result since Q3 FY 2014. The result was also notably below market analysts’ forecasts. Despite the slowdown, overall growth for the fiscal year came in at 7.1%, in line with the advance estimate but below the revised 8.0% growth in FY 2015 (previously reported: +7.9%). MOSPI revised the historical GDP series to reflect recent changes to the index of industrial production and wholesale prices.
The Q4 slowdown was broad-based across the economy. Private consumption slumped from 11.1% growth in Q3 to 7.3% growth in Q4, as households were squeezed by the lingering effect of the government cancelling bills in circulation in November that likely caused some to front-loaded expenditure in Q3. Investment contracted 2.1%, the first fall since Q4 FY 2014. Construction activity has plunged in the wake of demonetization, which hurt cash-based sectors, and high corporate leverage and stressed banks also dampened investment activity. Dampening the private sector’s blow, government consumption grew a rapid 31.9% amid an increase in government salaries, which propped up the overall result.
The external sector’s performance also deteriorated, subtracting 0.3 percentage points from growth. Although exports surged, growing 10.3% thanks to higher global demand, imports rose 11.9% in part due to higher oil prices.
Overall, the weak GDP print illustrates that weaknesses persist in India’s economy. The lingering effect of demonetization still ate away at household consumption, despite pay rises and a healthy monsoon season. Meanwhile, the effects of the recent methodological changes were more muted than expected and changes to historical data were rather marginal.