India’s GDP growth for the 1st quarter of fiscal 2017-18 could come in well below expectations on the back of GST implementation on the 1st of July. GDP growth for the full year 2017-17 is expected at around 7.3%. 4th quarter GDP growth for the last fiscal year 2016-17 came in at 6.1% on the back of demonetization effects.
IIP data for the first two months of the fiscal year shows slow growth with a growth of 2.3% against a growth of 7.3% seen in the same period in the last fiscal year. Manufacturing growth was at 1.8% against 7.1% seen last year. Vehicle sales growth saw muted passenger vehicle sales growth and negative commercial vehicles sales growth, in the 1st quarter of this fiscal year.
Trade data showed that exports for the months of May and June decelerated to single digit growth from double digit growth seen in April 2017. GST implementation in June has slowed down business for merchant exporters given the time lag between paying GST and claiming input credit.
Food inflation has dropped sharply on the back of fall in prices of farm produce, causing distress to farmers. As a result of farmer protests, state governments are waiving off farm loans. Rural income falling on the back of low prices of farm produce can hurt rural consumption, which in turn can hurt GDP. Read our analysis on CPI inflation for details of inflation trends.
Farm loan waivers by state governments come on top of the states absorbing SEB losses through issue of UDAY bonds. States fiscal health deteriorating can hurt many developmental projects, further impacting overall economic growth.
Bank credit growth at just 6% year on year as of June shows the lack of investment demand plus risk aversion by banks due to NPA’s. While working capital loans are now through the CP market where CP outstandings are at over Rs 4 trillion, infra projects except in the road sector are not taking off. Government has been spending heavily in the first quarter of fiscal 2017-18 with deficit touching 43% of total budget and that is leading to economic growth being kept afloat. However until private investment demand picks up, growth cannot be sustained through government spending alone.
RBI is most likely to lower rates in its August policy review but that will still take time to filter into growth in aggregate demand. Interest rates need to stay low for a while for growth to pick up and stay up.