New Delhi: India’s economy grew faster in 2015-16 than earlier estimated, which could result in slower growth in the current fiscal because of a higher base.
Data released by the statistics department on Tuesday showed India’s gross domestic product (GDP) grew 7.9% in 2015-16 against an earlier estimation of 7.6%.
The statistics department earlier this month said India’s economic growth is likely to decelerate to 7.1% in 2016-17 based on the 7.6% estimate for the previous year, chiefly because of an industrial slowdown. However, it did not take into account the possible impact of demonetisation.
On Tuesday, the Economic Survey 2016-17 authored by chief economic adviser Arvind Subramanian said the demonetisation exercise could slow GDP growth by 25-50 basis points in 2016-17 on the baseline growth assumption of 7%. One basis point is 0.01%.
For 2017-18, the survey projected the economy to grow in the wide range of 6.75% to 7.5%.
The upward revision of the 2015-16 data was mostly due to a significant increase in growth estimates for the industrial and services sectors. While the industrial sector is now estimated to have grown at 8.2% against the earlier estimation of 7.4%, the services sector is estimated to have grown at 9.9% against 8.9% earlier. The farm sector growth rate was, however, cut to 0.76% from 1.2% estimated earlier.
Gross fixed capital formation, the proxy for investment demand in the economy, was also underestimated earlier. It is now revised to 6.1% from the earlier estimate of 3.9% for 2015-16. Private consumption demand, however, has been marginally revised downward, from 7.4% to 7.3% for 2015-16.
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Agencies that have revised India’s growth projection downward after the note ban may be forced to further scale down their projections for 2016-17 based on the new information. The International Monetary Fund (IMF) has cut its growth projection for India to 6.6% for 2016-17 and 7.2% in 2017-18, taking into account the impact of the note ban.
“In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," IMF said.
Andreas Bauer, senior resident representative of IMF in India, said the downgrade for 2016-17 was because growth in the first half of the fiscal was slower than IMF’s expectations, as well as demonetisation. “We expect the impact of demonetisation will gradually dissipate in 2017-18 and there will be a recovery in economic growth," he added.
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Moody’s and its Indian unit Icra Ltd on Monday said India’s gross value added (GVA) growth at basic prices will ease in 2017 to about 6.6% from around 7% in 2016, with a likely pick-up in the second half, as the economy readjusts after the invalidation of old Rs500 and Rs1,000 currency notes in November.
The Economic Survey pointed out that demonetisation will have both short-term costs and long-term benefits. “Briefly, the costs include a contraction in cash money supply and subsequent, albeit temporary, slowdown in GDP growth; and benefits include increased digitalization, greater tax compliance and a reduction in real estate prices, which could increase long-run tax revenue collections and GDP growth," it said.