At 7%, GDP Growth in October-December 2016 Defies Note Ban Fears

GDP growth in the third quarter was only slightly lower than the 7.3% reported in the previous quarter.

Data released on Tuesday suggests that consumption in the economy held up well despite the currency shortage. (Photo: iStock)

Growth in the Indian economy slowed marginally to 7 percent during the October-December quarter, defying expectations of a sharper hit to economic activity due to the note ban announced in November. A Bloomberg poll had pegged growth for the quarter at 6.1 percent.

The 7 percent growth in the third quarter of the current fiscal is only marginally lower than the 7.3 percent growth reported in the previous quarter.

In terms of Gross Value Added (GVA), growth was at 6.6 percent during the December-ended quarter.

Along with the quarterly estimates, the Central Statistical Office also released the second estimate of full-year growth and pegged it at 7.1 percent – unchanged from the advance estimates.

In the third quarter of the current fiscal year:

• The manufacturing sector grew at 8.3 percent compared to 7.1 percent in the previous quarter
• The construction sector saw growth slip to 2.7 percent compared to 3.5 percent in the previous quarter
• The trade, hotel, transport segment reported growth of 7.2 percent compared to 7.1 percent in the previous quarter
• Growth in the financial services segment was at 3.1 percent compared to 8.2 percent in the previous quarter
• The agriculture sector grew at 6 percent compared to 3.3 percent last quarter
• The mining sector also rebounded, showing growth of 7.5 percent in the third quarter compared to -1.5 percent in the previous quarter

A slowdown in growth in the December quarter was widely anticipated by economists. The government’s decision to withdraw notes of Rs 500 and Rs 1,000 on November 8 had led to a currency shortage which impacted activity in cash-driven sectors.

Availability of currency has since normalised and all restriction on cash withdrawals are likely to be lifted on March 13, according to the Reserve Bank of India (RBI).

The central bank expects that as availability of currency improves, growth will rebound. On February 8, the RBI said that it expects growth in FY18 to rebound to 7.4 percent from an estimated 6.9 percent this year.

Consumption Holds Up

Data released on Tuesday suggests that consumption in the economy held up well even in the face of a currency shortage.

Private final consumption expenditure rose 7.2 percent compared to a year ago. In the preceding quarter, private consumption had grown by 7.6 percent.

Government consumption has been the greatest support for the economy in the current year. In the third quarter, government consumption grew 17 percent, following 15.2 percent growth in the second quarter and 18.8 percent growth in the first quarter.

Gross fixed capital formation, an indicator of private investment, also rose marginally by 0.5 percent in the December quarter. Capital formation had declined for the last three quarters.

(This article was first published on BloomberQuint.)