India’s gross domestic product accelerated to 6.6% in the quarter but a poll by Reuters shows an increasing confusion over GST, which will dampen activity in the coming months. The forecast was from a survey of more than 40 economists taken in the past week. It compares with the growth of 6.1% in the first three months, which was the slowest in the last two years. The range of forecasts was wide from 5.7% to 7.2%.
This would leave Asia’s economy behind China, which reported a growth of 6.9%, but is still among the top performing economies in the World. Narenda Modi’s government surprised the country in November 2016 by the demonetization move, which wiped out about 86% of cash in circulation, which had crimped the consumer demand in a cash dominated economy.
While the economy has bounced back from the cash shock, the forecast as per the latest Reuters poll said that this pick up could be short lived. The 6.6% growth forecast is down from 6.9% which was expected in a survey carried out in July. There is uncertainty about how smoothly the GST will be implemented which is still tough to forecast. Launched on July 1st, to harmonize the various value added tax regimes to one national tax, GST has had an impact across various sectors in the economy.
The impact has been tough on micro, small and medium sized businesses that had shown signs of stabilisation before demonetization and the launch of GST. The impact combined with the ongoing stress in large corporates will drag down the GDP in the coming months. Most policy moves and structural reforms introduced recently are suited for the normal and boom times rather than the current phase of slowdown which is accentuating the intensity of the downturn. There is confusion among businesses about the pricing of their goods and services which is partly responsible for a contraction in the manufacturing and service industry in the country. The industrial production has also gone down and the factory activity is forecast to have remained in a rut through August. It is expected to show some signs of recovery in the coming months. The August Purchasing Managers’ Index is forecast at 49.3 versus 47.9 in July. Any number which is below 50 shows a contraction. The forecasts were also wide in range from 47.8 to 51.9. The RBI became the first major central bank in Asia to have cut interest rates this year but it has left the market guessing whether there is more space for trimming.
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