Strangely enough, the first advance estimates on GDP growth for this year have not factored in the impact of demonetisation on the economy. Chief Statistician TCA Anant conceded that it was not possible to take November trends in credit growth and bank deposits into account because of the extraordinary nature of the period. An estimate of 7.1 per cent GDP growth for 2016-17, against 7.6 per cent in 2015-16, seems optimistic when one considers that GDP growth in the first half was 7.2 per cent, with a tendency for second-half growth to be flatter unless it is lifted by indirect tax collections. The deceleration in manufacturing and services after demonetisation is unlikely to lead to a spurt in tax collections this fiscal. Therefore, Q2 growth of 7 per cent looks improbable. The CSO has pegged agriculture growth at 4.1 per cent this year, against 1.2 per cent in 2015-16, on the strength of an 8.9 per cent rise in kharif foodgrain production. Even if this income growth does materialise, it is unlikely to translate into demand for consumer goods in the near future. This is because demonetisation may have driven the rural population, less served by banks, to hold on to cash even if the currency situation ‘normalises’ in a couple of months.
In a scenario of demand compression, the estimates for manufacturing growth in 2016-17 (7.4 per cent, against 9.3 per cent in 2015-16) appear optimistic. The recent RBI survey of non-financial companies for the second quarter suggests a pick-up in sales (perhaps pay panel-driven) but less so in profits, owing to rising raw material prices, therefore reducing investible surplus. Whether the CSO estimates are compatible with the fall in capital formation as a share of GDP (from 32.3 per cent of GDP in 2014-15 to an estimated 29.1 per cent in 2016-17) and a falling manufacturing Purchasing Managers’ Index in December is a moot point. Services, in the form of construction, retail and transport, are cash-driven and likely to be affected in the near future. An overall growth rate of over 7 per cent is, therefore, predicated on enhanced public expenditure (12.8 per cent, against 6.6 per cent in 2015-16), manifested in pay panel payouts.
As a worst-case scenario, we could be back to the 6 per cent growth levels of 2014-15 this fiscal, with the effects of the downturn dragging into 2017-18. This could happen in the event of weak consumer and investor sentiment dragging each other down and the former holding on to cash (precautionary demand for money). Therefore, the economy may not bounce back to normal even after bank currency chests are filled and the RBI lowers the repo rate. Banks should finally be willing to lend rather than park funds in G-Secs. On the demand side, job uncertainties could dampen demand for credit even if rates fall. Seen along with global headwinds on the trade front, the importance of domestic demand cannot be exaggerated. The Centre must prepare for a spending push in the Budget, both in physical and social infrastructure, to redress the demand compression.