At 7%, Third Quarter GDP Growth Defies Demonetisation Fears

Growth in the Indian economy slowed marginally to 7 percent during the October-December quarter, defying expectations of a sharper hit to economic activity due to the currency exchange program announced in November. A Bloomberg poll had pegged growth for the quarter at 6.1 percent.

The 7 percent growth in the third quarter of the current fiscal is only marginally lower than the 7.4 percent growth reported in the previous quarter. In terms of Gross Value Added (GVA), growth was at 6.6 percent during the December-ended quarter.

Along with the quarterly estimates, the Central Statistical Office also released the second estimate of full year growth and pegged it at 7.1 percent - unchanged from the advance estimates.

For the third quarter of fiscal year:

• The manufacturing sector grew at 8.3 percent compared to 7.1 percent in the previous quarter
• The construction sector saw growth slip to 2.7 percent compared to 3.5 percent in the previous quarter
• The trade, hotel, transport segment reported growth of 7.2 percent compared to 7.1 percent in the previous quarter
• Growth in the financial services segment was at 3.1 percent compared to 8.2 percent in the previous quarter
• The agriculture sector grew at 6 percent compared to 3.3 percent last quarter
• The mining sector also rebounded, showing growth of 7.5 percent in the third quarter compared to -1.5 percent in the previous quarter

Overall, while the services segment saw growth slow to 6.8 percent in the third quarter compared to 8.2 percent in the second quarter, the industrial and agricultural segment surprised positively. Industry grew at 6.6 percent in the third quarter compared to 4.2 percent in the second quarter. This is contrary to other indicators such as the manufacturing purchasing managers’ index (PMI) which fell sharply in November and December but showed a rebound in January.

A slowdown in growth in the December quarter was widely anticipated by economists. The government’s decision to withdraw notes of Rs 500 and Rs 1000 on November 8 had led to a currency shortage which impacted activity in cash driven sectors. Availability of currency has since normalised and all restriction on cash withdrawals are likely to be lifted on March 13, according to the Reserve Bank of India (RBI).

When asked whether the third quarter GDP estimates capture the impact of demonetisation, chief statistician TCA Anant said that all available data has been included.

Did Commodity Prices Save The Day?

Saugata Bhattacharya, chief economist at Axis Bank pointed to higher commodity prices as one factor that pushed up growth during the quarter. The strong growth in mining and, in part, in manufacturing, may be linked to higher prices of commodities ranging from oil to metals.

“Mining was the biggest surprise. The presumable explanation for this is the way that mining numbers are computed. In the first estimates of GDP, you look at the sales of some of large mining companies and these companies have done very well in the third quarter because of the way commodity prices have moved,” said Bhattacharya. He added that some of the strength in the manufacturing segment may also be linked to energy companies where refining margins have expanded.

The higher commodity prices would have also played a role in the difference between GDP growth (7 percent) and GVA growth (6.6 percent) since higher indirect taxes and subsidies are built into the former.

Consumption Holds Up

Data released on Tuesday suggests that consumption in the economy held up well even in the face of a currency shortage.

Private final consumption expenditure rose 10 percent compared to a year ago. Government consumption continued to be the greatest support for the economy in the current year. In the third quarter, government consumption grew 19.6 percent.

Gross fixed capital formation, an indicator of private investment, also rose after a three quarter decline.