Q1FY18 GDP – TAKES IMPACT OF GST ON ITS SHIN

By Ruma Dubey

Prior to the GDP announcement, the Fiscal Deficit numbers came in. Fiscal deficit, which is the difference between the Govt income and spending was at Rs.50.4 lakh crore while the Budget for FY18 has set the target at Rs.54.70 lakh crore or 3.2% of GDP. So we are at 94% of the set target. The government’s total spending stood at Rs 8.08 lakh crore, a little more than one-third of the FY18 target, mainly on account of front loading subsidy payments.

And RBI put an end to the great big mystery surrounding the impact of demonetization – how much money came back? In its Annual Report released yesterday, the RBI stated that  98.96% of Rs 500 and Rs 1000 notes (by value) that were invalidated due to the demonetisation exercise had been returned by the end of June. The estimated value of the banned notes that RBI got was Rs 15.28 trillion v/s Rs 15.44 trillion of the invalidated notes that were in circulation as of 8 November.

The effect of demonetization was seen on the Jan-March GDP which had come in at 6.1% and now in the April to June quarter, Q1FY18, GDP slipped to 5.7% (QoQ) and down sharply from 7.9% (YoY), thanks to GST. The big question which all analysts were asking was whether it would be closer to 7% but clearly, it has slipped from there to below 6% and this took everyone by surprise as almost all had expected a sharp upturn in growth, feeling that the effect of demonetization was finally left behind.

The Gross Value Added growth (GVA), which is GDP minus net taxes remained unchanged at 5.6% (QoQ). The worst performance was from the manufacturing sector whose GVA fell to 1.2% v/s 10.7% (YoY) while agriculture grew from 2.1% to 2.3%. Construction GVA too fell from 3.1% to 2% and that of finance, insurance and realty fell from 9.4% to 6.4%. Trade, hotels & transport actually rose from 8.9% to 11.1%.

Clearly, growth is taking the impact of demonetization and ushering in of GST on its shin.  This GDP number clearly goes on to show what the corporate earnings of Q1FY18 have been telling us – there was confusion and chaos as people were destocking all inventory and this in turn hit production. Thus the slippage to below 6% that we see today is the direct impact of GST.

It’s a big relief to know that we are no longer the ‘fastest growing’ economy in the world as China, in Q4 itself held the mantle with a 6.9% growth. We say it is a relief because it always easier to breath and concentrate on growth when the pressure is simply to remain first – it is then that numbers and ground reality start looking unreal, with no sense of concurrence between the two.

This was the last set of data which the Central Statistics Office (CSO) used estimates of the older tax regime; from Q2 onwards, the CSO will have to use rely on estimates as there are no estimates of “past data” for GST. Thus for the next four quarters, the CSO will have to make its own “learned” estimates to arrive at the GDP.

There is truly nothing to be disappointed with the GDP number as it finally shows effects of such huge overhauls – demonization and GST undertaken in the country. If the number had continued to remain robust while companies were reporting dismal numbers, it would come forth as pretty “cooked up.” This 5.7% growth reflects the true picture and that comes as a relief; some faith is restored in the statistics put out by the Govt!

How will the markets react? After the heady full-on run northwards, this could be a temporary cue for some profit taking but it could be soon brushed off as data of the past, which is already discounted for and once again lurch forward, looking for the next trigger.