GDP grows 7% in Q3 despite notes ban, manufacturing sector surprises with 8.3% growth

The Indian economy shrugged off demonetization blues in the third quarter of financial year 2016-17 to register a healthy 7 per cent GDP growth rate, albeit lower than the 7.4 per cent in the previous quarter.

The Central Statistical Office on Tuesday also projected a 7.1 per cent growth rate for the full fiscal; the Reserve Bank of India and the Economic Survey have projected GDP growth of 6.9 per cent and 6.5 per cent, respectively.

Commenting on the numbers, Economic Affairs Secretary Shaktikanta Das said, “GDP numbers negate the impact of demonetization. We maintained 7 per cent growth”.

The biggest surprises, though, were the manufacturing and construction sectors, which recorded 8.3 per cent and 2.7 per cent growth, respectively.

The cash crunch following demonetization had been widely expected to dent consumer spending over concerns that companies would cut production to prevent inventory pile-up. The sharp turnaround in investment activity, to a growth of 3.5 per cent in Q3 FY2017 from the contraction in H1 FY2017, was unexpected, ratings agency ICRA said.

The growth coming from the bumper kharif crop and manufacturing too belied the International Monetary Fund’s (IMF) projection last week that growth would slow to 6 per cent in the second half of the financial year.

Agriculture, which accounts for 15% of GDP, is expected to have a strong showing in FY17, with whole-year food grain production estimated at a record high of 272 million tonnes.

Ashutosh Khajuria, Executive Director, Federal Bank, said, “With the bumper kharif crop and the expected bumper rabi crop, agriculture is going to be a big contributor to the GDP numbers. The better-than-expected GDP numbers could also be as the white economy was not impacted and the adverse impact was borne by the parallel black economy.”

The advance estimate was released to help government make the Budget which was presented one month in advance.

In a statement CSO said, “Agriculture and allied sector growth estimated at 4.4 5 in 2016-17, up from 0.8% last fiscal. Advance GDP growth estimate for current fiscal is now at 7.1%, unchanged from its earlier projection.

Aditi Nayar, Principal Economist, ICRA Limited, said, “The biggest surprises in Q3 FY2017 were posed by the 8.3%manufacturing growth and the 2.7% rise in construction activities, with the latter expected to have been adversely affected by the cash crunch. The sharp turnaround in investment activity, to a growth of 3.5% in Q3 FY2017 from the contraction in H1 FY2017 is also unexpected. Moreover, some other indicators offer surprising trends. For instance, rural wage inflation recorded a marginal dip to 6.0% in December 2016 from 6.2% in October 2016, despite the expectation of loss of jobs in less-formal urban sectors pushing migrants to return to their villages.

RBI in its policy on February 8 had said, “Growth is expected to recover sharply in 2017-18 on account of several factors.” It was banking on consumer spending bringing cash back in the economy which in turn would spur retail and also revive bank funding to projects.