gdp-plunges-to-6.1

After a more or less giddy ride of being the “the world’s fastest-growing large economy”, India for the first time since 2015 trailed China in the growth rate. The country registered a growth rate of 6.1% in the March quarter. This growth rate is much below the GDP growth of 8 per cent in 2015-16, 7.5 per cent in the previous year and the expected growth of 7.1% the current year.

Demonetisation seems to be the sole cause for the slowing down of the GDP growth rate. Some observers also believe that the reason for the decline in growth could be that as a proportion of GDP, investment has trended downwards for some time, with very few investors and companies following up with actual money after having promised to invest in India. Investment is believed to have shrunk in absolute terms by 30% in 2016-17.

Sectors Affected

According to the Central Statistics Office, the growth rate declined – under demonetisation impact in the fourth quarter in the following sectors:

Manufacturing, mining, trade, hotels, transport, communication, services related to broadcasting, financial, real estate and professional services.

Of the above the following have been very badly affected:

Mining Sector: Demonetisation has had an impact on this sector as it disrupted the black money chain. The Income Tax Department had set up a probe into the illegal iron and manganese ore mining as well as a probe into many companies for evading tax.

Construction Sector: This sector was the hardest hit by demonetisation and saw a fall in growth by 3.7%.

Manufacturing Sector: The growth rate of this sector fell to 5.3% in the last quarter from 8.2% in the preceding quarter. This was mainly because the cash crunch induced by the demontisation had a negative impact on the unorganised units of the manufacturing sector.

Agricultural Sector : Here the growth rate came down to 5.2% from 6.9% in the previous quarter. This sector has an availability of a large stream of exempted income as well as a large amount of black money concealed in the name of agricultural income which is again exempted from tax. The sector was also directly affected with a delay in purchase of seeds and fertilisers during the cropping season due to demonetisation.

All the sectors which have been affected by demonetisation, except for manufacturing, are the ones red flagged by experts for prevalence of black money.

Is the fall in GDP growth actually a prophecy for Good News in the future?

The decline in the growth rate actually gives credence to the Modi Government in their fight against black money and may be good news for the Indian economy. The falling GDP is most probably a sign that black money is being eradicated from the Indian economy. According to a PTI report in June, 2016, 20% of the GDP of India, amounting to approximately Rs 30 lakh crore, constituted black economy.

The decline in the GDP may also lead to the cutting down of lending rates by the RBI (Reserve Bank of India).

There is a prediction by experts that once the GST (Goods and Services Tax) is rolled out from the 1st of July this year, there will be a boost in the economy. In fact, as per predictions, the growth forecast for the current fiscal year is slated between 7-8%.

With the Indian Meteorological Department predicting a normal monsoon, India will see its first normal monsoon since Narendra Modi government took over in 2014 and it augurs well for agriculture and allied sectors for it will help in propelling the growth of these sectors.

Conclusion

Demonetisation is never good news for any economy as it reduces currency in circulation. But the Modi Government used it as a weapon to curb fake currency and control the hoarding of a parallel cash economy in the form of black money which will only help in the growth of the Indian economy in the long run. A greater portion of unorganised pockets of the economy will make a shift to formal economy, which may see better figures in the next quarter and fiscal year.

A decline in the GDP growth can never be good news. But what India is facing is a slowdown in its growth and not a decline. With the deficit being controlled and the fundamentals being in place and sound, India is sure to forge ahead again in growth in the near future.