India: Growth slides ahead of GST implementation
August 31, 2017
The Indian economy slowed significantly in the first quarter of FY 2017, recording the worst result in three years. According to recently-released data from the Ministry of Statistics and Programme Implementation (MOSPI), GDP expanded a weak 5.7% annually in Q1 FY 2017, which was sharply below the 6.1% increase in Q4 FY 2016. The result notably undershot market analysts’ expectations, who had forecast that growth would bounce back after a demonetization-induced slowdown in Q4 FY 2016.
Behind the economic downturn was a deterioration in the external sector combined with weak domestic demand. Export growth slowed notably from 10.3% in Q4 FY 2016 to 1.2% in FY 2017, the worst result since Q4 FY 2015. A strong rupee and confusion over the looming implementation of the Goods and Services Tax (GST) likely weighed on the result. Anecdotal evidence suggests that firms were unsure of how to price products, with some even providing pre-GST discounts, which likely caused disruptions to economic activity. Meanwhile, import growth rose to 13.4% in Q1 from 11.9% in Q4 FY 2016, a multi-year high. The rise was partly driven by rising demand for gold, as consumers front-loaded purchases before the introduction of the GST.
On the demand side, fixed investment growth was sluggish, coming in at 1.6% (Q4 FY 2016: -2.1% year-on-year). Investment has been a weak spot in India’s economy, largely due to a stressed banking sector and many over-leveraged firms. Private consumption increased 6.7% in Q1, below Q4 FY 2016’s 7.3% rise. In addition, government consumption growth slowed from 31.9% in Q4 FY 2016 to 17.2% in Q1. Many analysts had predicted a pick-up in public spending to offset moderate household consumption thanks to the earlier presentation of the budget for this year; however, this failed to materialize.
Overall, the weak GDP print illustrates the toll that the government’s ambitious reform agenda is taking on the economy. The lingering effect of demonetization combined with confusion over the GST are having a dampening effect on activity, which has slowed notably in the past two quarters. On the bright side, these measures should only amount to a temporary shock, and the economy should gain steam in the coming quarters.