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We’re slowing! Jaitley accepts reality, cuts FY18 GDP growth projection to 6.5%

Agriculture, mining, manufacturing and construction sectors are growing slowly

Reality bites, finally.

Union Finance Minister Arun Jaitley on Friday accepted the reality of a slowing economy, and said the nation’s GDP or gross domestic product will expand at a slower pace of 6.5 per cent in FY18. That is a full one per cent downgrade from the FM’s earlier projection of around 7.5 per cent growth this financial year.

Businesses were hit by the nationwide rollout of the goods and services tax or GST, which also caused the manufactucturing sector to pause in third quarter amid a major exercise of destocking and restocking as the tax system witnessed a complete overhauld.

The slower growth projection also casts doubts over the government’s ability to meet its 3.2 per cent fiscal deficit target for the financial year, as slower growth would also mean slower tax generatoin for the government exchequer.

The Indian economy expanded at 7.1 per cent in 2016-17, recording the fastest growth across the globe.

Most economists have been lowering their growth forecast for the economy to the 6.2-6.5 per cent range for the financial year, citing the teething troubles from GST rollout.

Ahead of the GDP advance estimate numbers, India benchmark equity indices closed at record closing highs, posting their fifth consecutive weekly gain, as financials and metal stocks rose tracking global markets on strong economic data.

BSE Sensex closed 0.54 per cent up at 34,153, while the broader Nifty index of NSE ended 0.51 per cent higher at 10,558. Both the indices gained nearly 0.3 per cent for the week.

The first advanced estimates indicate GDP to grow at 6.5 per cent for FY18 as against 7.1 per cent growth in FY17 mainly on the back of higher growth of 7-plus growth in ‘public administration, defence & other services’, ‘trade hotels, transport, communication and services’, ‘electrical, gas, water supply and other utility services’ along with ‘financial, real estate and professional services’ while the growth in agriculture, mining, manufacturing, and construction are expected to grow at 2.1 per cent, 2.9 per cent, 4.6 per cent and 3.6 per cent, respectively, said Arun Thukral, MD & CEO, Axis Securities.

Since these estimates are based on data till Novemer 2017, it has not captured the latest uptick in the vehicle sales and the improvement in the steel and cement sectors, he said, adding that “We expect the final numbers to be revised upwards as and when they happen. Given the tepid growth estimates from agriculture, it gives us a feeling that the budget 2018 will have a higher focus on agriculture and rural economy. And as the estimates are missing the RBI expectations, the central bank is likely to pause in its next policy meeting in February, 2018.”

Ranen Banerjee, Partner of Public Finance and Economy at PwC India said the advanced estimates for annual growth of 6.5 per cent can be achieved if there is an average of 7 per cent growth in the last two quarters.

“Given the momentum seen in the core sector growth, PMI indices and developed world economies, the optimism may not be belied. Further wearing off of the demonetisation related residual effects as well as progressively stabilising transitionary effects of GST is likely to support the higher growth rate estimates for the last two quarters. If the economy grows at 6.8 per cent in Q3 and 7.2 per cent in Q4 supported by base effects, we are likely to achieve the CSO advance estimates. Crude prices could be the only story spoiler,” he said.

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