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01 Dec 2017 6:26 PM, Insights Mahesh Vyas

Shocks don’t impact growth

The twin shocks of demonetisation and GST have not caused an identifiable dent in India’s growth rates. There was no exceptional fall in the growth rates after either of the two events. In fact, the industrial sector surprised by performing much better than expectations during the quarter of July-September 2017, which was the first quarter post GST.

Professional forecasters surveyed by RBI had expected the industrial sector to grow by 7.3 per cent till their July 2017 forecasts (which were released on August 2). Then, they dropped this expectation sharply to 4.1 per cent in their September forecast (released on October 4) possibly in anticipation of problems arising out of a messy GST. The particularly low growth of the sector during the April-June quarter announced in August also played a role in the fall in expectations from the sector.

But, the industrial sector just did not oblige as it coolly pencilled a reasonably handsome growth of 7 per cent admist all the dust and fury of GST.

Similarly, there is no evidence of an impact of demonetisation as well. Demonetisation was announced on November 8, 2016. Real GVA grew by 6.7 per cent during the quarter ended December 2016. This was 0.12 percentage points lower than the growth in the previous quarter. But, the previous quarter itself had seen a much bigger fall of 0.79 percentage points before demonetisation.

Growth fell for two consecutive quarters before demonetisation and it continued to fall for two quarters after demonetisation. The fall before demonetisation (1.9 percentage points) was higher than the fall post demonetisation (1.1 percentage points).

Apparently, the Indian economy is shock-proof.

Earlier, the Indian economy was expected to bounce back robustly after the thumping electoral victory of the current government. However, it failed to do so. Many of the problems of the economy have been resolved. The fiscal deficit has remained well within reasonable limits and the government has shown no signs of compromising this. The current account deficit has shrunk in spite of poor exports growth and inflation has been under control.

In spite of stable and credible macroeconomic parameters, investments have failed to pick up and as a result, growth continues to remain anemic.

Apparently, the Indian economy does not budge sharply in either direction. But, its growth was sliding till June 2017 quarter.

Professional forecasters have had to re-calibrate their forecasts repeatedly downwards because of the economy’s failure to respond to the improved macroeconomic conditions.

During the quarter ended September 2017, although the professional forecasters got the industrial growth rate wrong, they got the overall growth quite right.

Growth estimates for the quarter ended September 2017 issued by CSO were broadly in line with expectations of professional forecasters. RBI’s Survey of Professional Forecasters released on October 4 showed that the median value of 25 respondents’ expected real GVA growth was 6.2 per cent. This was almost as close as it can get to the CSO’s release of 6.1 per cent. The mean expectation was 6.3 per cent and forecasts ranged from 5.1 to 7.3 per cent.

We may say then that the economy performed almost as expected by most professionals. But, this is very different from what happened during the previous quarter ended June 2017 when the economy under-performed by a substantial margin. Professional forecasters had expected a growth of 6.8 per cent and the economy delivered only 5.7 per cent.

Now, professional forecasters expect the next quarter - ended December 2017 - to see a growth of 6.8 per cent. But, this was their expectation as of September and they will make at least two more forecasts before CSO releases its estimates on February 28, 2018. Similarly, they expect the economy to grow by 7.3 per cent in the quarter ended March 2018 but, they will be making at least three more forecasts before CSO releases its estimates for this quarter at the end of May 2018.

The general expectation is that the economy will accelerate from its 6.3 per cent growth as of quarter ended September 2017. However, the expected acceleration has been moderated. As a result, the expected growth during 2017-18 is 6.6 per cent against an expectation of 7.8 per cent a year ago.

Apparently, the under-performance of the Indian economy compared to our expectations reflects a more secular gradual fall of growth rates to lower levels. This may continue to remain true till investments pick up.