BackHysteresis risk
While it is almost certain that economic growth will bounce back in the September quarter, it remains to be seen whether the Indian economy has recovered from the twin shocks of GST and demonetisation
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The sharp decline in economic growth in the June quarter came as a surprise even to economists who had expected some loss of momentum. The consensus explanation is well known: The growth in economic activity slowed because of the industrial destocking before the transition to the goods and services tax (GST).
This week, the government is scheduled to release the first estimates of national output for the September quarter. It is almost certain that economic growth will bounce back from the lows of the first quarter. A lot of high-frequency data also supports this view.
The more interesting question is whether the disruptions from the twin shocks of demonetisation and GST will dissipate soon or whether they will have lingering effects. The other way to pose the question is: How soon will supply chains be rebuilt?
The financial stress faced by smaller enterprises may or may not be repaired quickly. The jury is still out. The policy lesson: focus on supply disruptions rather than a demand stimulus.
ALSO READ: What to expect from September quarter GDP growth numbers
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