The Central Statistics Office’s second quarter GDP estimate has created barely a ripple with market and policy attention now firmly focussed on gauging the dent to economic activity in the coming quarters due to demonetisation. Nevertheless, Q2 trends do have interesting takeaways for policymakers looking to engineer a turnaround. The data show that after a subdued April-June quarter, the economy registered a mild uptick in July-September, with real GDP growth improving to 7.3 per cent from 7.1 per cent. But while the quality of growth improved and the recovery was broadbased, the pace of expansion disappointed and was below street expectations of 7.5-7.6 per cent.
The bright spots in the Q2 numbers came from agriculture expanding by a healthy 3.3 per cent (2 per cent in the same quarter last year), and a notable acceleration in swathes of the services economy —construction (3.5 per cent per cent growth against 0.8 per cent last year) and trade, hotel, transport and communication services (7.1 per cent against 6.7 per cent) — even as manufacturing slowed (7.1 per cent versus 9.2 per cent). A big kicker to growth also came from the 12.5 per cent jump in government expenses on administration and defence, triggered by the pay commission. But the ground reports flowing in post-demonetisation suggest it is precisely these segments of the economy (barring government spending) that are cash-dependent and have seen a sharp slump. Though the Centre has announced some measures (such as the use of old currency notes for seeds) to meet input needs of farmers during rabi sowing, disruptions to the supply chain for agricultural produce and sharp swings in crop prices may need to be addressed through policy intervention too. Services such as trade, hotels and transportation are dominated by small, unorganised players and the need of hour is timely credit flow to them at competitive interest rates. Carrots for banks to lend to these SMEs may help alleviate their situation. But all this apart, the numbers reiterate that private consumption expenditure (56 per cent of GDP) continues to be the single most important factor driving India’s growth story. Yet it is consumer confidence that has been most severely impaired by demonetisation. Reports of fewer footfalls and falling sales from across consumer-facing sectors show weak consumer sentiment and deferral of discretionary spends. The only measure that will remedy this and power up spending once again, is the normalisation of currency supplies from the RBI to the banks. The sooner the Centre lifts the withdrawal limits in banks and stops the rationing of new currency notes, the more certain one can be of a bounce-back in consumer confidence.
Overall, too much of the Government’s attention today seems to be engaged in fire-fighting operational issues arising from the cash shortage, plugging leakages and pinning down tax evaders. Unless equal attention is devoted to cushioning ordinary citizens from the economic fallout of demonetisation, the gains from hard-won economic recovery of the last two years can be quickly lost.