Economy and Business

GDP slowdown: Demonetisation’s fallout has hurt the economy but there are reasons to be optimistic

India’s economy, or gross domestic product, grew a disappointing 6.1% in the January-March quarter of 2016-17. This growth rate however was not surprising.

Jun 2, 2017
India’s economy, or gross domestic product, grew a disappointing 6.1% in the January-March quarter of 2016-17. This growth rate however was not surprising. A deceleration in the pace of economic growth was evident from the beginning of the financial year. This was worsened by the disruption on account of demonetisation. Despite a slowdown in economic growth some positive features such as macroeconomic stability are reasons to remain optimistic. But they need to be complemented by a sharper approach to economic policy making. This will put India on an elevated economic trajectory.
 
The highlight of January-March quarter data is that the widely anticipated fallout of demonetisation showed up. Sift the data and what is apparent is that agriculture was a saving grace on account of a good monsoon last year, and government spending shored up consumption. But it is worrisome that construction, a key provider of jobs for surplus rural labour, shrunk by 3.7%. Demonetisation appears to have taken a toll here. Other areas in the economy’s service sector such as trade have also been adversely affected by demonetisation. Consequently, the quarterly growth in gross value added was just 5.6%, the fourth consecutive quarter which witnessed a slowdown.
 
GDP data also showed that some of the longer term problems continue to cast a shadow on the economy. The anaemic pace of increase in bank credit and a contraction in fresh investments checked economic momentum. Fixed investment as a proportion of GDP has been declining which means demand from consumers is the main driver of economic momentum. This feature is linked to troubles of banks. Indebted corporates have not been able to service their loans to banks, which has led to the latter’s problems of bad loans – making banks risk averse when it comes to disbursing fresh loans. The end result of these enduring problems is that the economy is functioning below potential.
 
Looking ahead, there is reason to be optimistic, as some of the problems on account of demonetisation have faded following the introduction of new currency. But other enduring problems need to be forcefully tackled. The recent ordinance empowering RBI to deal with bad loans needs to be followed through. Government should also be ready to recapitalise banks that have to take a hit on account of resolving bad loans. Once health of banks improves, the Indian economy will be on a firmer footing.
 
Times of India, June 2, 2017

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