Economy smell is not good- Slower growth forecast even without factoring in demonetisation but BJP gives full marks to PM

Narendra Modi at the BJP national executive meeting in
New Delhi on Friday. Picture by Ramakant Kushwaha

R. SURYAMURTHY AND JAYANTA ROY CHOWDHURY-TT, New Delhi, Jan. 6: India's economy is projected to grow at 7.1 per cent this financial year - far slower than the 7.6 per cent growth achieved in 2015-16.

The Central Statistics Office's forecast does not take into account the impact of the demonetisation launched on November 8. The prediction is based on data for the first seven months, that is, till the end of October.

CSO chief T.C.A. Anant conceded that the latest projection may have to be reworked once data for the remaining months became available.

"The sector-wise estimates are obtained by extrapolation of indicators like the index of industrial production (IIP) of the first seven months of the financial year and financial performance of listed companies in the private corporate sector available up to the quarter ending September 2016," the CSO said.

Anant said the advance estimates were based on data available so far but added that some indicators like bank deposits, which had turned volatile after demonetisation, had been excluded.

"This is a business-as-usual projection based on pre-demonetisation data," said Pronab Sen, former chairman of the National Statistical Commission. Sen said that based on his own calculations, assuming "much of the remonetisation happens by March", GDP growth this year would be about 1 percentage point lower than the CSO's forecast.

India remains the world's fastest growing major economy ahead of the 6.7 per cent growth in China, which is battling an industrial deceleration. The big question is whether India can retain its position once the impact of the demonetisation is fully factored in.

"Given the impact of demonetisation on actual activity from mid-November 2016 onwards, projecting GDP growth for the full year by extrapolating the trends up to October 2016 for most sectors may introduce more errors than in earlier years," said Aditi Nayar, principal economist, ICRA Ltd, a rating agency.

Nayar added that the rating agency's calculations suggested that the GDP growth could be nearer 6.8 per cent.

Economic growth this fiscal is predicated on a robust farm sector growth, thanks to good monsoon rain. But the bad news is that industrial growth has slowed considerably, the services sector's performance has been patchy and mining has shrunk.

According to the CSO's estimates, agriculture is expected to grow by 4.1 per cent, compared with 1.2 per cent last year.

The government has been insisting that demonetisation hasn't hurt sowing for the winter crop. But reports from the ground suggest the severe cash shortage has forced farmers to delay sowing and use cheaper seeds and fertilisers, which can affect yields.

Manufacturing is expected to grow by 7.4 per cent, compared with 9.3 per cent last year, and mining is likely to contract by 1.8 per cent, compared with a growth of 7.4 per cent last year.

Disappointed with the projections, industry has sought tax breaks in the budgets and rate cuts.

Ficci president Pankaj Patel said: "The advance estimates point towards... slow growth.... We look forward to a reduction in tax rates and further policy push to support demand and investments in the upcoming Union budget."