NEW DELHI: Economic growth picked up in the fiscal second quarter, boosted by a revival in the farm sector and higher government consumption, but the momentum could now lose some steam due to disruption caused by demonetisation. The economy expanded 7.3% in the July-September quarter, data released by the statistics office showed, faster than the 7.1% growth reported for the prior three months, but below the 7.6% increase recorded in the year-earlier period. It also missed economists’ median estimate of 7.5%.

Gross value added (GVA) growth in the second quarter was 7.1%, slower than the previous period’s 7.3% expansion. GDP and GVA growth in the first half of the year was 7.2%.

Experts said the growth could slip below 7% this fiscal year, and India could lose the tag of the fastest growing major economy to China, which expanded 6.7% in the July-September quarter.

“Going forward, no doubt we see an erosion in growth, given the shock of demonetisation that has largely affected demand in the economy due to a liquidity crunch, said Indranil Pan, chief economist at IDFC Bank, who predicted the full year growth at 6.9%. He expects economic activity to improve “reasonably” from the fourth quarter, an assessment seconded by some others as well.

“We expect that the impact of demonetisation on GDP will not be so significant as cash flow in the system is expected to improve considerably with transactions gaining traction rapidly,” said Gautam Mukhopadhyay, group chief economic adviser at State Bank of India.

Others were not so sanguine, suggesting the impact of demonetisation could linger much longer, dragging down activity for many quarters.

Others were not so sanguine, suggesting the impact of demonetisation could linger much longer, dragging down activity for many quarters.

“There are issues with the informal sector which is almost 45% of the economy and 80% of the employment,” said an economist, who did not want to be named. For the agriculture sector, the pain may last even after fourth quarter, the economist added. The government scrapped Rs 500 and Rs 1,000 notes with effect from November 9 to unearth black money, fight corruption and weed out fake currency, but the resultant cash crunch has hit economic activity, particularly the cash-based unorganised sector.

Chief Statistician TCA Anant said all the current estimates are based on assumption as there is no post demonetisation data available to ascertain the impact of the move. “We are in the process of analysing all the data and we will do the analysis in good time,” said Chief Economic Adviser Arvind Subramanian. “Uncertainty is on the monetary impact, short-term and long-term benefits. Since we are in uncharted water, we need to get a lot of data and need to put in a lot of analysis before we can come up something meaningfully worthwhile to reflect on.”


The agriculture sector grew 3.3% compared with 1.8% in the first quarter, helped by better monsoon rains after two years of drought. The construction sector, a big jobs generator, also performed better, growing 3.5% in the September quarter against 1.5% in the previous three-month period. Manufacturing GVA growth slipped to 7.1% from 9.1%. Mining contraction deepened at 1.5% and all other major sector performed below the first quarter. Consumption, both private and public, supported growth, rising 7.6% and 15.6%, respectively.

Investments emerged as the big concern with gross fixed capital formation declining 5.6% in the July-September quarter, and a further knock from demonetisation is very likely. “With consumption taking a severe hit during the thirds and fourth quarters due to de-legalisation of currency, the time span for investment recovery will get even longer,” said Sunil Kumar Sinha, principal economist at India Ratings & Research. Demand was expected to pick up with better farm output and boost from the recent salary hikes for government employees.

“Investment remains weak and our sense is that between the private and public capex, the former will remain a drag,” said Tushar Arora, senior economist at HDFC Bank, which cut India’s growth estimate for this year to 7.3% from 7.8% estimated earlier. Industry body CII said it expects a rebound in investment going forward because of the “decisive measures to bring transparency in the system and is committed to improve the investment cycle.”


One silver lining in the numbers is the higher nominal GDP growth, which suggests recovery in revenue growth for companies and better tax realisation for the government.

Nominal GDP, or national income estimated at current prices without adjusting for inflation, rose 12.1% in the past quarter, up from 10.4% in the previous period. “There is good news in the sense that real GDP growth has picked up, so there is a kind of steady improvement.

There is some indication of some improvement in underlying strength in the economy which is reflected in the fact that nominal GDP growth has accelerated,” Subramanian said.