Indian Economy is not in Danger!!! Why opposition is shouting that GDP Growth Rate has slowed down to 5.7%?

GDP (Gross Domestic Product ) Growth Rate Data came yesterday and for the first quarter of 2017-2018 which is precisely for the month of April, May and June it slows down to 5.7% as compared to last year 7.9% for the same quarter. This Growth Rate is lowest among last 13 quarters.

Let’s know Sector Wise Data which will basically explain you the reason

  • Manufacturing growth rate is 1.2% in this quarter as compared to 10.7% in same quarter last year.
  • Growth of eight core sectors also slowed down to 2.4 per cent in July. The contraction was mainly seen in output of crude oil, refinery products, fertiliser and cement.  Eight infrastructure sectors such as coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – raised by 3.1 per cent in July last year.
  • Take the heavily cash-reliant construction sector, for instance, where growth rate had fallen drastically due to a cash flow choke. But it rebounded in the June quarter, registering a growth rate of 2 per cent compared to the -3.7 per cent in the March quarter.
  • Growth in the trade and hotel transportation sectors, which were also heavily impacted by demonetisation, revived, registering a double-digit growth of 11.1 per cent against 6.5 per cent in the March quarter.

As I described 4 different sectors you can see that, these Sectors like Transport, Tourism and Construction which are heavily dependent on cash actually improved huge and strike growth of more than 5.7%. Thus DEMONETISATION is not responsible for this slow down. Currently, currency circulation is fine with 15.77 lakh cores. So anyone drawing inference and blaming Demonetisation for this plunge in growth rate are actually telling a lie.

The major area where it actually decline is formal manufacturing and core sectors and this is because of uncertainty related to the implementation of GST and related destocking seem to have an impact on industrial performance.

The next release of quarterly GDP estimate for quarter July-September (Q2FY18) will be released on November 30, 2017.

The real reason for the slide down of the growth rate is implementation of the Goods and Services Tax Act (GST). Though it came into force from 1 July, after the first quarter ended, most of the destocking activities were taken up by manufacturers in the preceding months; that is, during the first quarter. This is the reason why manufacturing data collapsed.

Another major reason for the fall seems to be the sharp decline in net exports growth, which stood at a measly 1.2 per cent in the first quarter compared to 10.3 per cent in the March one. Imports also registered a growth rate of 13.4 per cent, a mild increase in their 11.9 per cent growth rate in the previous quarter.

Shifting to the new wholesale price index (WPI), which is used as a deflator for many sectors of the economy for calculating the nominal GDP, may have also played spoilsport. The Department of Industrial policy production updated WPI by changing the base year from 2004-05 to 2011-12. It revised weights to the list of items that are used to calculate WPI and dump many which had become obsolete. The Index of Industrial production was also updated with 2011-12 as the new base year.

As you know now the reasons of plunge in GDP Growth Rate then it is clear that there is no reason why it can’t get rebound. If you see PMI of manufacturing, then it’s currently 51.2 against 47.9 in July which clearly shows that manufacturing is on the Rise. So Nov 30th Data will answer your entire question as it will reflect both GST and So called Demo Effect.

Abhishek Kumar