GDP growth contracted by 0.5% in the third quarter, its first negative since early 2011, due to weather-related disruptions in exports and weak government investment, raising the risk the economy would sink into its first recession in 25 years if the fourth quarter data also showed a fall. It is even more surprising that growth in the third quarter - when the economy was adversely affected on account of frictions from the currency swap - is also assumed to be nearly at par with the fourth quarter.
The CSO has pegged private final consumption at 58.7% of the GDP in third quarter, the highest in the last eight quarters.
Surprisingly, the manufacturing sector grew by 8.3 per cent in October-December against 6.9 per cent in the previous quarter when there was no note ban. The CSO estimates the agriculture growth at a whopping 6% in the third quarter. This shows that the impact from demonetisation on growth has been less than expected, and therefore the overall effect on growth for the full year 2016/17 will be limited to that extent. Government data states 7 per cent growth rate in October-December 2016 against 6.9 per cent in same quarter of previous year.
The Economic Survey for 2016-17 had projected India's GDP growth rate to reduce by 0.25-0.5 per cent in 2016-17 owing to cash squeeze in the economy following demonetisation.
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With demonetization denting consumer demand, overall vehicle sales in the month of December also fell for the first time in 11 months, dropping 1.36% from a year ago to 227,824 units. However, the data captured by the CSO does not reflect the same. Services activity plunged into contraction following the notes ban, and still hasn't recovered fully, while factory activity also declined in December before returning to a modest growth in January.
Chief statistician T.C.A Anant said that it was hard to assess the full impact of demonetization. On the currency crunch impacting growth in fourth quarter of this fiscal and subsequently, Panagariya said, "Currency shortages which have impacted the transaction would be addressed by the beginning of the fourth quarter". Since the recession ended in mid-2009, annual growth has averaged 2.1 percent, the worst performance for any recovery in the post-World War II period. India, it said, "is expected to regain its momentum, with growth rising to 7.6% in [the financial year ending in March] 2018 and strengthening to 7.8% in FY2019-20". For 2016-17, GVA growth is seen at 6.7 per cent, down from 7.7 per cent a year ago.
On Feb. 7, Modi defended the demonetization policy in parliament, saying the timing for the move was right as the country's economy was strong.
Chief Economic Adviser Arvind Subramanian last month said the official GDP figures may not completely reflect the "real and significant hardships" experienced by the informal sector, in which an expected nine out of 10 Indian workers are employed.
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