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World-beater status at risk as India rebuts threat to growth
[NEW DELHI] Prime Minister Narendra Modi's administration sought to refute concerns that the clampdown on cash would strip India of its status as the world's fastest-growing big economy.
Gross domestic product, which grew a slower-than-estimated 7.3 per cent in July to September, will slump to 6.5 per cent over the next quarter, according to the median estimate in a Bloomberg survey of 14 economists. That's weaker than the previous 7.8 per cent projection and the 6.7 per cent forecast for China.
"At the moment all these statements are based without data," TCA Anant, the government's chief statistician, told reporters in New Delhi on Wednesday. "Assumptions can lead people to all sorts of conclusions and I don't want to contest at that level. I would rather suggest you wait for the data."
A steep economic slowdown risks hurting foreign investment into India and voters' perceptions of Mr Modi before key state elections next year. While supporters say his Nov 8 move to abruptly invalidate 86 per cent of currency in circulation will help curtail tax evasion and graft, critics say it will dent demand in an economy where almost all consumer payments are in cash.
"Attention has already turned to the impact of the government's demonetisation measures, which could cause significant disruption in the current quarter and possibly beyond," Shilan Shah, Singapore-based India economist at Capital Economics Ltd, wrote in a report after the GDP data. The central bank will lower the policy rate to 6 per cent from 6.25 per cent at a Dec 7 review to "cushion the blow", he said.
July-September data showed: Manufacturing growth slowed to 7.1 per cent from 9.2 per cent a year earlier and mining contracted 1.5 per cent versus a 5 per cent gain. While expansion in trade and similar services picked up to 7.1 per cent from 6.7 per cent, that in financial services slowed to 8.2 per cent from 11.9 per cent. Much of the growth was supported by government spending, which surged 15.2 per cent from the previous year, and private consumption, which rose 7.6 per cent.
Worryingly, investment fell 5.6 per cent, a continued run of disappointing data. Economists at Standard Chartered lowered their GDP growth forecast for the 2017 fiscal year to 6.8 per cent from 7.7 per cent, and to 7.2 per cent from 7.8 per cent for 2018. They cited the demonetisation move, the likely implementation of a goods and services tax, and a more uncertain global environment after Donald Trump's US election victory.
The government's ability to stimulate investment is also limited, as another set of data released Wednesday showed that the budget deficit hit 79.3 per cent of the full-year target in the first seven months of the fiscal year, compared with 74 per cent the previous year. The revenue shortfall, which is 92.6 per cent of the full-year goal compared with 73 per cent, "remains a source of concern," said Aditi Nayar, principal economist at Icra Ltd.
A separate gauge, which showed a sharp improvement in infrastructure growth, was also skewed by surges in steel and refinery products, which may be temporarily hurt by the demonetisation, she said.
The rupee briefly erased gains in the offshore market after the GDP data, with the one-month non-deliverable forward contract falling to 68.74 a US dollar from 68.65. The currency, stocks and sovereign bonds gained in the onshore market, which had shut before the release.
What could help Mr Modi is his move to penalise tax evaders and impose penalties on unexplained income exposed by the cash clampdown, said Sujan Hajra, chief economist at Anand Rathi Securities Ltd. The government also estimates that as much as 5 trillion rupees (S$103.9 billion) could be left undeclared, which could be transferred to the government for social spending.
"While demonetisation will lead to slower growth, the voluntary disclosure of income could be expansionary," Mr Hajra said. "So it is tough for the statistician to comment on what the impact will be from demonetisation when the situation is so fluid."