The withdrawal of 500 and 1000 rupee notes does not seem to have had much of an impact on economic activity or on Narendra Modi’s popularity. His BJP party won a major victory in legislative elections in Uttar Pradesh, India’s most heavily populated state. Although Mr. Modi still falls short of a majority in the upper house of parliament, this victory nonetheless consolidates his power: he now controls 17 states and two union territories. Despite demonetisation, GDP growth reached 7% year-on-year in the third quarter of fiscal 2016/17, buoyed by robust domestic demand. Nonetheless, the difficulties of public-sector banks still seem to be squeezing financing for corporate investment.
7% growth in Q3 2016/17
In the third quarter of fiscal year 2016/17 (ended 31 March 2017), India reported GDP growth of 7% year-on-year (y-o-y), which is much stronger than expected. Despite the withdrawal of 500 and 1000 rupee notes in November, domestic demand increased 11.4% y-o-y in the third quarter of fiscal 2016/17 (vs. 6.9% the previous quarter).
According to preliminary estimates, growth rates were particularly strong for household consumption, public spending and investment. The only component that made a negative contribution to growth was net exports, due notably to an acceleration in imports (+4.5% yo- y), a reflection of the strong increase in domestic demand.
The acceleration in investment (+3.5% y-o-y) seems to be due solely to government actions. Although quarterly statistics do not allow us to differentiate between investments by economic agent, the growth in bank lending to companies (+1.5% y-o-y) suggests that private investment did not accelerate.
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by Johanna MELKA