Q4 AND FY17 GDP SHOWS IMPACT OF DEMONETIZATION

By Ruma Dubey

The much awaited GDP growth rate for FY17 came in at a muted 7.1%  v/s expectations of around 7.5%. In fact rating agency was bang-on as it had estimated a 7.1% GDP but this was for Q4FY17 and not FY17! Q4FY17 GDP came in much lower at 6.1%.

Looks like finally we are seeing reality – what is happening on the ground is close to what these numbers indicate. Also it is reassuring to see that we are seeing some impact of the demonetization coming in; the numbers were getting unbelievable and this sort of brings back a more credible picture. This is probably the temporary slowdown which we all were talking about; the small inconvenience we were warned of.

Before this GDP data came in, the core sector data for April were not very enthusing either. Growth of eight core sectors - coal, crude oil, natural gas, refinery products, fertilisers, steel, cement declined to 2.5% v/s 8.7% (YoY).

Ours is a bank driven economy and credit offtake has been lowest almost in a decade. Thus growth coming down is expected. But companies not adding new capacities is logical – as such most companies are not utilizing full capacity as demand remains muted. So till demand takes off and companies start adding capacities, how will credit offtake get better? There is an urgent need to add capacities from current levels and that can probably happen only from second half of FY18, once the GST becomes a reality.

Talking about GST, those on the ground say that dealers across the board have companies to not send stocks from 1^st June to July as no one is currently clear about how GST will treat inventory held. Thus implementation of GST will be short term disruptive but the long term gains will be more than worth it.

How will the markets react? No one has expected this lower growth as we are constantly used to being “pleasantly surprised” with much higher growth than expected. This time it has come the other way round. We could see a temporary blip and markets would be soft. Earnings have not been great and we have seen more downgrades this Q4 than upward revision. Thus the first half of current fiscal will show pains but after the good monsoon, hopefully, second half is where all will reap a rich harvest.

But the market will get over this soon as the rally will begin for RBI interest rate meet, scheduled for 7^th June. The media will build the hype and go rah-rah over a rate cut which will not happen, taking all things into consideration.

The other important date will be 14^th June when US Fed in widely expected to hike rates. And that is another disruption that we need to contend with – after all there will at least two more rate hikes from US in 2017.

The next release of quarterly GDP estimate for the quarter April-June, 2017 (Q1 of 2017-18) will be on 31.08.2017.