Key takeaways from the GDP advance estimates for 2016-17

The Central Statistical Office (CSO) affiliated to the Ministry of Statistics and Programme Implementation (MOSPI) put out the advance estimates for full year GDP on Friday. This is the first of the estimates and hence subject to change. The early estimates are not too encouraging. Full year GDP fro 2016-17 is likely to be 7.1% as against 7.6% in the previous financial year. That is a full 50 bps lower than the previous year and is a matter of concern. Here are the key takeaways…

Key takeaways from the CSO Advance Estimates of GDP for 2016-17…

  • The full year GDP estimates have been pegged at 7.1% that is 50 bps lower than the 7.6% growth achieved in the previous year. This is closer to the annual growth estimates that have already been put out by leading global brokerage houses as well as rating agencies.
  • It needs to be remembered that these are the first of the advance estimates and more estimates will come by as more data points pour in. These estimates are extrapolated based on data in the first 7 months till the end of October 2016. Hence the impact of demonetization is not evident in these advance estimates of GDP for the fiscal.
  • Within the overall GDP, the big positive is expected to be agriculture. It is likely to grow in this fiscal year at 4.1% compared to just 1.2% in the previous year. The spurt in agriculture output is largely going to be driven by the Kharif output which is higher by 9% on a YOY basis on the back of a good monsoon after 2 successive years of drought.
  • On the agricultural front, it also needs to be remembered that the Rabi cropping season fell during the peak of the demonetization drive. While there is no hard data, initial reports suggest that the cash crunch did impact the Rabi sowing activity. The full impact of agricultural activity will only be known once the Rabi figures also come in.
  • Manufacturing is likely to get slower by nearly 200 basis points. That was already evident from the tepid IIP figures on a month-on-month basis. The impact of demonetization could be much harsher in case of manufacturing as the PMI-manufacturing is indicating that production and inventory have been hit quite badly by the cash crunch. That needs to be watched.
  • Services account for over 60% of GDP. Within the services space, utility services and government driven social and defence services have registered a smart growth. These are sectors where the government push has helped. However, trade, communications and financial services have all shown signs of slowing down.
  • The initial indications of the services sector coming from the PMI-services are not too encouraging. At around 46.7, the PMI-services is in contraction mode for 2 months in succession. We expect the impact on the services sector overall to be more acute once the full impact of demonetization is factored in.
  • The big question is how much will demonetization impact the final GDP number? The pessimistic scenario is that the impact on the manufacturing and services sector will be quite sharp and the full year GDP will dip to a level closer to 6.5%. That is what many brokerage houses and economists are already talking about.
  • The more optimistic scenario is that the liquidity imbalance created by demonetization may stabilise by end of January. Combined with a big push to digitization, this could lead to a sharp V-shaped recovery in IIP and services and pull the overall GDP growth closer to 7.5%. That will be a big boost for the Indian economy and the equity markets at a crucial juncture.
  • The reality may actually lie somewhere in between. The GDP growth may not falter to 6.5% nor bounce back to 7.5%. We may end the year closer to the 7% mark. While demonetization will have its impact on the full year GDP, its negative ramifications will not be as grave or as deleterious as is being made out in various quarters today. Digitization will be a long term positive.
  • The big question as an outcome of the GDP numbers will be the impact on FDI inflows. India has been getting FDI flows to the tune of nearly $50 billion per year and has overtaken China as the single largest recipient of FDI in the world. If the growth advantage over China diminishes further, India may not remain the magnet for global FDI.
  • There is also the billion dollar question on global portfolio flows. While FPI debt flows are dependent more on rate differentials and INR stability, equity flows are a different ball game. Till date, India’s high GDP growth has given it immunity from rapid FPI outflows. India cannot afford to cede the GDP advantage at this point of time.

In a nutshell, the GDP advance estimates are a kind of wake-up call to the Indian economic thinkers and policy makers. The next few revised estimates may throw more light on the final picture.

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