Economic growth slowed in the fourth quarter of fiscal year 2016/2017. This slowdown is only partly due to the demonetisation process. As of September, investment began to slow and the production of capital goods to decline. Looking beyond the difficulties of some corporates, the deterioration in the quality of bank assets has placed a heavy strain on loan distribution. Faced with this situation, the government adopted a new measure to increase the central bank’s role in managing non-performing loans. Although this measure should accelerate the debt resolution process, it will not offset the major capital needs of the state-owned banks.
Real GDP growth slowed to 6.1% year-on-year in the fourth quarter of fiscal year 2016/2017, which ended on 31 March 2017. This slowdown is partly due to the demonetisation process introduced in November 2016. By late May 2017, money supply in circulation was still 16% below the October 2016 level. The withdrawal of INR 500 and INR 1000 notes triggered a slowdown in household consumption. At the same time, investment contracted (down 2.1% y/y excluding inventory in Q1 2017) and net exports made a negative contribution to growth, despite a buoyant increase in exports.
The slowdown in household consumption is likely to be temporary. In contrast, the contraction in investment (down 1.7% y/y in Q1 2017) is more troublesome because it dampens the country’s medium-term growth prospects. It cannot be blamed solely on demonetisation. The decline in investment confirms the contraction in industrial production of capital goods reported as of September 2016. Until now, higher public investment has offset the decline in private investment. Yet in the fourth quarter of fiscal year 2016/2017, the government cutback spending in order to limit the fiscal deficit to 3.5% of GDP.
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by Johanna MELKA