Q2 GDP growth to hit by 40 bps to 7.2% due to demonetisation, says Icra

Indian economy is expected to slow by at least 40 bps to 7.5 per cent for the full financial year due to the demonetisation drive, which is likely to create a lull in consumption-oriented sectors in the short term, ratinga gency Icra noted.

"Based on our current assessment of the likely impact of demonetisation, we expect full year GDP and GVA (gross value added) to be 40 bps lower than our earlier forecasts of 7.9 per cent and 7.7 per cent, respectively, which presumes economic activity would resume normalcy in the fourth quarter of 2016-17," Icra Senior Economist Aditi Nayar said in a report.

Consumption-oriented sectors, particularly those involving large cash transactions such as real estate, retail,construction, jewellery, travel and tourism and trade are likely to experience a lull in the short term. Also,cash-based transactions in the unorganised sector would get disrupted, particularly in rural areas, she added. The agency also pegged second quarter GDP to grow at a lower pace of 7.2 per cent due to poor showing by the industryand services sectors, which will negate the expected boost to agriculture and allied activities from the normal monsoon.

Accordingly, pace of expansion of GVA at basic pricesis expected to ease mildly to 7.2 per cent in the second quarter from 7.3 per cent each in the same period of 2015-16 and first quarter of 2016-17, she said. Nayar, however, said farm, forestry and fishing growth will improve considerably, to 5 per cent in the second quarter, from 2 per cent a year ago, as the first advance estimates for crop production have forecast a significantly higher expansion in kharif output in 2016 for coarse cereals,pulses, oilseeds and cotton, relative to the increase in theirs own area. The kharif harvest, which largely took place in October,is likely to support agricultural growth in early part of the third quarter, she said.

The rating firm expects industrial growth to ease to 5.5 per cent in July-September, from 6.3 per cent a year ago, led by manufacturing, mining and electricity sub-sectors. The GVA growth for the manufacturing sector has been significantly higher than the volume growth as borne out by IIP for several quarters, partly led by the decline in input costs for corporates in some sectors, reflecting lower commodity prices, she noted.

"Second quarter corporate earnings suggest that net income growth continues to outpace revenue. Nevertheless, given the lagged effect of a rise in commodity prices amid modest demandand an unfavourable base effect, real manufacturing GVA growthis likely to decline to 7 per cent in the second quarter from9.2 per cent." A similar downward spiral is expected in services aswell, which is likely to ease to 8.7 per cent inJuly-September, from the earlier 9 per cent, due to moderationin Railways' freight revenue, petrol and diesel intake andcontraction in services exports, Icra added.