India's GDP growth is likely to be 5.8% in third quarter of FY17, says SBI

Highlights:

1.  We estimate that the third quarter (Q3) GDP growth will be at 5.8% and the fourth quarter (Q4) it will recover to 6.4%, cited SBI in its Ecowrap report

2. Demonetisation will have short-term negative impact on growth numbers though in the long-run growth will increase as formalisation of economy increases and remonetisation happens at a faster pace

3. The Central Statistics Office (CSO) will announce the country's Q3 FY17 gross domestic product (GDP) numbers next week on February 28 

India's economy is projected to grow below 6% in the third quarter (Q3) of the current fiscal year 2016-17 (FY17) on account of the short-term negative impact of the government's demonetisation decision on the growth numbers, State Bank of India (SBI) said in its Ecowrap report on Wednesday. 

"We estimate that Q3 GDP growth will be at 5.8% and the fourth quarter (Q4) it will recover to 6.4%. For FY17, we believe GDP growth will recover to 6.4%," SBI's chief economic adviser Dr Soumya Kanti Ghosh, said in a report.

The Central Statistics Office (CSO) will announce the country's Q3 FY17 gross domestic product (GDP) numbers next week on February 28.

In a surprise move to curb black money, corruption and terrorism, prime minister Narendra Modi announced demonetisation of old currency notes of Rs 500 and Rs 1,000 on November 8 last year, which resulted in massive cash crunch across the country. 

"...Demonetisation will have short-term negative impact on growth numbers though in the long-run growth will increase as formalisation of economy increases and remonetisation happens at a faster pace," Ghosh said in a report.

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Moreover, SBI's Ecowrap report has projected sectors like construction, real estate, cement and fast moving consumer goods (FMCG) to witness a decline in sales for the third quarter (Q3) and to recover thereafter but construction companies with high share of government orders are likely to be less impacted. 

"However, now the situation has almost normalised and we maintain that close to 70% of the extinguished currency will be remonetised by February-end," Ghosh said. 

According to CSO, the country's GDP is likely to grow by 7.1% in FY17 as compared to the growth rate of 7.9% in FY16, which is impossible given the extent of liquidity shock that has led to a drastic consumer spending shock, cited SBI in a Ecowrap report.

"Given that 7.1% GDP estimate for CSO implies a 7.8% GDP growth or Q4 FY17, perhaps for the first time CSO will revise downwards the estimates for FY17 on February 28 itself (instead of May 2017)," Ghosh said in a report. 

The Reserve Bank of India (RBI) has estimated the country's Gross Value Added (GVA) growth for FY17 at 6.9%, as against its earlier estimate of 7.6%.

"... If the CSO goes with an estimate of 6.9% for FY17 (the same as that being projected by RBI) in that scenario Q4 FY17 will continue to show roughly an expansion of 7.6%, an unlikely scenario," he further added. 

SBI in its report has projected the country's overall economic growth at 6.6% in FY17 with recovery in the next fiscal on the back of remonetisation. 

"Overall, our estimate for the second half (H2) of FY17 GDP growth is 6.1% with a downward bias (CSO H2: 7.0%). We estimate FY17 growth at 6.6%. The good news is that FY18 growth could move up faster if demand comes back faster post remonetisation," Ghosh said in a report. 

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