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India growth slips in wake of cash ban

, March 1, 2017, 0 Comments

india-growth-slips-marketexpress-inIndia’s economic growth rate dropped only slightly at the end of 2016 despite a controversial ban on high-value banknotes in November. Analysts doubt the government’s figure and fear the full impact has yet to be felt.

Gross domestic product (GDP) in one of the world’s fastest growing economies expanded seven percent between October and December 2016, showing a growth decline in what’s the country’s third fiscal quarter after 7.3 percent in the previous three-month period.

Although coming in lower, the growth figure published by India’s statistics office on Tuesday exceeded most analysts’ predictions because they had expected a sharper decline in the wake of a controversial cash ban by the government.

Prime Minister Narendra Modi shocked Indians in November, when he ordered to remove all banknotes with 500-rupee ($7.5 or 7.07 euros) and 1,000-rupee denominations from circulation immediately. Modi has defended the so-called demonetization scheme as a necessary strike against corruption and a way of boosting tax revenues by dissuading people from doing business in cash.

Impact still unclear?

Chief statistician T.C.A Anant said that it was difficult to assess the full impact of demonetization. “Policies like demonetization are very difficult to assess without a lot of data. I will not like to draw any conclusions at this stage,” he told a news conference.

Anant admitted though that the finance and real estate sectors had been adversely affected by the move, but said some sectors such as agriculture and mining had in fact performed better than expected.

But Shilan Shah, analyst with Capital Economics, believes the only gradual slowdown was “hard to square” with other data showing activity had slowed sharply.

“There are widespread doubts about the accuracy of the national accounts numbers, and the unexpected strength of today’s data will do nothing to allay these concerns,” he said in a note to investors.

And indeed, a number of other data, including for vehicle production and rail passenger volumes, suggest that economic activity fell sharply towards the end of last year as a direct result of the government’s measures.

Sunil Sinha, principal economist at India Ratings & Research, told the news agency AFP that figures for the upcoming quarter might be “a better parameter” to judge the impact of demonetization. “When I look at third quarter more carefully, half the quarter, including the festive season when spending is high, was gone by the time demonetization kicked in. Wait and see what happens in the fourth quarter,” he said in reference to the Diwali holiday in October.

OECD warns of wealth gap

The government data came on the same day as the Organization for Economic Cooperation and Development (OECD) released a survey, praising Modi for India’s high growth, but warning that not all Indians were benefitting from it.

At the launch of the report in Delhi, OECD secretary-general Jose Angel Gurria described India’s pace of reforms as “quite remarkable,” saying the implementation of inflation targets and a loosening of foreign direct investment (FDI) rules had been “major factors behind the growth.”

But although the government had brought about 140 million people out of poverty in less than 10 years, there was no time for complacency, he said. “Growth has not been sufficiently inclusive on a number of dimensions, as reflected in a still high poverty rate,” the OECD report said.

The Paris-based organization called on the government to do more to improve access to basic services, such as electricity and sanitation, noting that public spending on health care was low at slightly more than one percent of GDP. Moreover, the quality of primary education was “uneven” although almost all children had access to it.