Economy shakes off Demonetisation & GST impacts with 6.3% growth

NEW DELHI: India’s growth staged a recovery in the September quarter as the economy emerged from the shadows of the impact of demonetisation and rollout issues linked to GST, prompting the government to say that it was poised for a durable recovery in the months ahead.
Data released by the Central Statistics Office (CSO) on Thursday showed that the economy grew 6.3% in July-September, the second quarter of the current fiscal year — faster than the June quarter’s 5.7% —the expansion led by robust manufacturing. Growth had slowed to a three-year low in Q1 as the impact of demonetisation and GST implementation issues hurt expansion.
Since then, a raft of positive news has lifted sentiment. India improved its ranking significantly in the World Bank’s Ease of Doing Business survey while global ratings agency Moody’s Investor Services upgraded the country’s sovereign rating. Another agency S&P kept the rating and the outlook unchanged but applauded the reform measures unleashed by the government which it said should help boost growth in the coming months.
“The deceleration trend in the overall growth which was witnessed since the first quarter of last fiscal year has been now reversed; The acceleration in growth this quarter has been helped by a rapid growth in manufacturing which increased from 1.2% in the first quarter to 7% in the second quarter,” finance minister Arun Jaitley said, exuding confidence that the momentum would be sustained.
The upbeat GDP data comes in the midst of the Gujarat assembly poll campaigning where opposition parties have sought to use the slowdown narrative to attack the BJP. The rebound in growth is expected to act as a major boost for the BJP and help reassert prime minister Narendra Modi’s reformist credentials. The 6.3% growth in the September quarter has helped break the cycle of 5 quarters of slowing growth. “It is quite a significant trend reversal,” the country’s chief statistician T C A Anant told reporters.
“I would expect the overall dynamics to reassert itself and the growth path to return to more normal level and that is in some sense happening,” he said. Economists pointed to several positive signals such as a good kharif crop, boost to manufacturing due to GST concessions. They expect growth to be closer to 7% for the full year.
The sluggishness in the farm sector emerged as a concern. The farm sector grew 1.7% in the September quarter, slower than the previous quarter’s 2.3% and below the 4.1% in the second quarter of 2016-17.
“The clear conclusion that one can draw is that the value added originating from the rural sector has slowed more sharply than the urban sector for the first half. Overall the source of growth in the first half has been the urban areas. However certain important schemes such as the Bharatmala, low cost housing in rural areas are expected to mitigate the trend,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.
“Nevertheless the policy prescription for the next the coming budget should be that the rural focus of the previous two budgets must continue. There is also a need to prioritize certain rural schemes on an urgent basis. The doubling of farm income must receive the thrust,” he said.


Final GST data may push up Q2 GDP

The Goods and Services Tax (GST) appears to have had an immediate and significant impact on economic growth, according to tax analysts and government officials.

The fiscal second quarter (July-September), which coincided with the July 1 roll-out of GST, saw GDP growth accelerate to 6.3%, from 5.7% in the first quarter. The new indirect tax regime had an impact — both in terms of the methodology of calculating GDP, as well as on the performance of the input parameters themselves.

‘Uncertainty over GST’

“In a normal year, businesses are conversant with the tax processes, and so know their tax liability, so the collections are usually in line with what is anticipated,” TCA Anant, Chief Statistician of India and Secretary to the Ministry of Statistics and Programme Implementation, said on Thursday. “However, this year, the uncertainty surrounding GST procedures, and the leeway the government has given in terms of extended deadlines, has meant that the indirect tax collections for the particular period are still being updated.” Gross Domestic Product (GSP) is calculated by adding the indirect taxes figure to Gross Value Added (GVA), and subtracting subsidies, Mr. Anant said, highlighting the reason that GST collections are so crucial for accurate GDP computation.

“On the one hand, there would possibly have been some disruption in the early days of GST due to the uncertainty surrounding the new processes,” Anis Chakravarty, Lead Economist at Deloitte India, told The Hindu. “On the other hand, net taxes are added back to the GVA and somewhat lower collections on the GST front could have had some dampening effect as compared to a non-GST year.”

Mr. Anant said the GDP data for the second quarter could see an upward revision when the government released its revised estimates as it would reflect the final indirect tax collections — a figure that would include the taxes collected from late filers as well.

“The Q2 growth pick up is almost entirely due to the growth pick up in manufacturing, which came to a standstill prior to GST due to destocking,” D.K. Srivastava, Chief Policy Advisor at EY India, said. “When GST got implemented, then orders started flowing in and growth picked up. So, GST has had a major impact on this quarter’s growth rate. In the coming quarters, the GST reforms in terms of rates and compliance should play a significant part in manufacturing sector growth.”

Mr. Anant said services was another area impacted by GST as earlier sales tax data was used to gauge activity.

“What we looked at instead was the sales tax collections for items that are currently outside GST, and what we found was that there is a stable ratio between those collections and overall sales tax collections in the past,” Mr. Anant said. “So, we used that as the basis to estimate services sector activity in this quarter.”

According to tax analysts, the services sector, especially hotels and restaurants, have suffered due to the increase in their effective tax rate under GST, and so the tax collection data from these sectors could be dampened.



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