Consumption demand will fall in November and December and revive in Q4 FY2017: Saravana Kumar, CIO, LIC Mutual Fund

India Infoline News Service | Mumbai | December 01, 2016 15:14 IST

Revival of growth to pre-demonetization levels will depend not only how quickly the authorities is able to pump in currency, but also how much GoI is able to garner as taxes from the newly announced amnesty scheme.

GDP_2
The Q2 FY2017 GDP numbers are meaningless for policy formulation and future forecast in light of the paradigm policy shift caused by demonetisation. However, looking into the rear view mirror, real GDP growth in Q2 FY2017 came in at 7.3% YoY (down from 7.6% in Q2 FY2016 and sequential pick up from 7.1% in Q1 FY2017).

In nominal terms, Q2 FY2017 GDP growth almost doubled to 12.1% up from 6.4% in Q2 FY2016. GVA (Gross Value Added) showed a similar picture with real GVA growth at 7.1% in Q2 FY2017 down marginally from 7.3% in Q2 FY2016 as well as Q1 FY2017. Nominal GVA growth stood at 11.3% in Q2 FY2017, more than doubling from the 5% growth registered in Q2 FY2016. In Q1 FY2017, nominal GVA growth was 9.9%.

Expenditure on GDP:
  • Despite the increased public spends, gross fixed capital formation (GFCF) contracted by 3.2% in nominal terms and 5.6% in real terms, which reiterates the onerous path ahead with regard to revival in the private capex cycle.
  • Private consumption expenditure growth accelerated to 7.6% vs 6.7% sequentially and 6.3% YoY in real terms due to improved monsoons and partial disbursements of 7th CPC payments.
  • Government expenditure grew robustly by 15.2% in real terms vs 18.8% sequentially and 3.3% YoY, in line with the trend in the growth of the GoI’s non-interest non-subsidy revenue expenditure.

Prior to the demonetization of Rs 500/Rs 1000 notes, it was believed that consumption would be the key driver of growth in FY2017 on the back of a good monsoon and Pay Commission awards. The construct has changed with 85% of currency in circulation now being demonetised leading to severe shortage of currency. As of November 27, 2016, only 15.6% of the demonetised currency has been replaced and thus is likely to impinge on consumption. Hence, it is expected that consumption demand will fall in November and December and revive in Q4 FY2017 only after circulation of currency is restored. Revival of growth to pre-demonetization levels will depend not only how quickly the authorities is able to pump in currency, but also how much GoI is able to garner as taxes from the newly announced amnesty scheme.

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