Why GDP growth below 7% could be bad for India?

During the week, the MOSPI announced the GDP numbers for the 2nd quarter ending Sep-2016. The GDP at 7.3% was nearly 20 basis points lower than the consensus estimate of 7.5%. If you remove the 20 basis points contributed by indirect taxes, the actual Gross Value Added (GVA) was only 7.1%. This raises serious questions for the RBI and the government policy makers.

Full year GDP closer to 7%…

It may be too early to estimate the full year GDP at this point of time. However, the original government estimate of 7.5% does look quite far-fetched at this point of time. Global investors like UBS and Nomura as well as rating agencies like Fitch are already estimating the full year GDP to go below 7%. A lot will depend on the last 2 quarters of this fiscal year. But the way liquidity has been squeezed by demonetization, the footfalls are likely to fall further and sales could also fall further from here.

How demonetization will impact…

In the aftermath of the demonetization announcement, the worst affected in the stock markets were companies in the auto, FMCG, private banking and jewelry space. That is hardly surprising considering that this demand is most likely to be postponed due to the liquidity crunch. Also these sectors operate extensively in rural and semi-urban areas where the liquidity impact has been a lot more acute. The auto numbers for November are also a stark indication. Most of the large auto companies like M&M, TVS Motors, Tata Motors and Bajaj Auto have reported flat to negative growth in sales. With the rural sector being badly hit, its impact on GDP could manifest in the coming months.

How does GDP look for 2016-17?

Most consensus estimates for GDP growth for 2016-17 are veering towards 6.8-6.9%. With fiscal deficit touching 80% of full year target, there is not much leeway for the government to prop up the economy by spending. The lower PMI for November already indicates weak business confidence among corporates. The net impact could be a 70-80 bps loss in GDP growth.

Why lower GDP is a problem…

It would be naïve to believe that global investors will look at lower GDP as a temporary outcome of demonetization. In fact, lower GDP will mean that the premium commanded by India among emerging markets (EM) may also come under question. Also, in terms of global flows, India commanded a premium to the MSCI allocation due to its superior growth rate that was largely driven by domestic consumption. The recent demonetization exercise has put a question mark over both. The next few months could be really critical!

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