CSO’s advance estimate pegs GDP growth (at market prices) at 7.1%YoYfor FY17: This is above our expectation of 6.8%YoY and compares with the7.6%YoY GDP growth registered in FY16. On a gross value added (GVA)basis, growth is estimated at 7% in FY17 (vs. 7.2% in FY16), which is higherthan our expectations of 6.6%YoY. It needs to be noted that the release ofadvance estimates for FY17 has been preponed by a month on account ofrescheduling of the FY18 budget to 1st Feb-17. These estimates are used bythe government to calculate the deficit numbers and growth for next year.
Intriguingly, CSO has estimated nominal GDP growth at 11.9%YoY in FY17(using the GDP deflator of 4.5%), which is higher than the 11%YoY growthused in the Feb-16 budget calculation. As this excludes the demonetisationeffect and is likely to be reduced, the government needs to keep this factor inmind when working on fiscal numbers.
Advance growth estimates do not fully capture the impact ofdemonetisation measures and hence is likely to be reduced later:Considering the limited data availability and uncertainty with respect to theactual impact of demonetisation on the real economy, we believe the advanceestimates do not give a true picture of the state of the economy. The sectorwiseestimates are obtained by extrapolation of indicators like (i) IIP for firstseven months of FY17; (ii) financial performance of listed companies in theprivate corporate sector available up to the Sept-16 quarter; (iii) first advanceestimates of crop production; and (iv) finances of central and stategovernments, information on indicators like sales tax, deposits & credits,passenger and freight earnings of railways, passengers and cargo handled bycivil aviation, cargo handled at major sea ports, sales of commercial vehiclesetc. available for first 7/8 months of FY17. We believe the release of secondadvance GDP growth estimate along with 3Q GDP growth estimates on 28thFeb will be key to watch out for having a more reasonable view regarding theimpact of demonetisation on economic growth. We will be monitoring the highfrequency economic indicators to assess the impact of demonetisation on thereal economy over the next few months.
Economic activity to temporarily slow over the next two quarters in wakeof demonetisation before bouncing back: Unlike the CSO advance estimateof growth (measured on a GVA basis) to decelerate to 6.7% in the second halfof FY17 (vs. 7.2% YoY in the first half), we estimate the slowdown to be morestark at 6%YoY over the same period. We expect demonetisation measures tohurt consumer discretionary spending in the short term. Small & mediumenterprises and the rural economy where cash transactions are quite prevalentwill be at a disadvantage. The supply chain disruptions and adverse impact onproductivity is also likely to delay the recovery in the investment cycle. Indeed,there are certain asset classes that are likely to see a long-lasting impact,including real estate/land sales, jewellery etc as the unorganised segmentshrinks. That said, we expect the slowdown in economic activity to be largelylimited, spread over the next 6-9 months, with growth to bounce back from thesecond half of FY18. We continue to expect inflationary pressures to remaincontained (~4.5% CPI inflation estimated in FY18) and see scope for further50-75bps cut in the repo rate over the next 12 months.
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