- Fitch has expressed surprise over the December quarter GDP numbers
- The ratings agency says GDP numbers could be revised lower later on
- Fitch expects RBI policy rate to stay at its current level of 6.25%
Global ratings agency Fitch has expressed surprise over the better-than-expected December quarter GDP or gross domestic product growth numbers. Indian economy posted a growth rate of 7 per cent in the October-December quarter, according to data released by the statistics department last month. In comparison, economists in a Reuters poll had estimated GDP to growth at 6.4 per cent. "This number looks somewhat surprising, as real activity data released since demonetisation pointed to weak consumption and services activity - because these transactions are cash-intensive. By contrast official data suggest that private consumption was strong (though services output growth moderated quite substantially)," Fitch said in a report.
One of the reasons for the discrepancy, "could be the inability of official data to capture the negative effects of the demonetisation on the informal sector," Fitch said. "This raises the possibility that these initial estimates of the growth impact of demonetisation could well be underestimated, with the possibility of revisions to official GDP data later on."
Prime Minister Narendra Modi had banned 500 and 1000 rupee notes on November 8 last year, cancelling 86 per cent of the money in circulation at the time.
Many economists also have said that the December quarter GDP numbers could be revised lower later as more data comes in. "Given the fact that a lot of data seems to be counter-intuitive, we expect some downward revision in December quarter GDP as more data, particularly from the informal sector, is captured," said Teresa John, economist at domestic brokerage Nirmal Bang.
Fitch now expects Indian GDP to grow by 7.1 per cent for 2016-17, before picking up to 7.7 per cent in both 2017-18 and 2018-19. "Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 per cent hike in civil servants' wages (Seventh Pay Commission) at the state level."
The rating agency also said that the economy would also benefit from the earlier accommodative monetary policy stance of the Reserve Bank of India which has helped to bring down overall interest rate in the financial system. "There may still be some positive impact from the previous accommodative monetary policy stance," the ratings agency said. However, the Reserve Bank signalled in its February meeting that its interest-rate easing cycle had come to end. Fitch expects RBI policy rate to stay at its current level of 6.25 per cent in the foreseeable future.
The Indian economy would also benefit from the higher government spending, it added. RBI Deputy Governor Viral V Acharya on Monday said demonetisation impact on GDP may be seen in the current quarter in some segments.
One of the reasons for the discrepancy, "could be the inability of official data to capture the negative effects of the demonetisation on the informal sector," Fitch said. "This raises the possibility that these initial estimates of the growth impact of demonetisation could well be underestimated, with the possibility of revisions to official GDP data later on."
Prime Minister Narendra Modi had banned 500 and 1000 rupee notes on November 8 last year, cancelling 86 per cent of the money in circulation at the time.
Many economists also have said that the December quarter GDP numbers could be revised lower later as more data comes in. "Given the fact that a lot of data seems to be counter-intuitive, we expect some downward revision in December quarter GDP as more data, particularly from the informal sector, is captured," said Teresa John, economist at domestic brokerage Nirmal Bang.
Fitch now expects Indian GDP to grow by 7.1 per cent for 2016-17, before picking up to 7.7 per cent in both 2017-18 and 2018-19. "Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 per cent hike in civil servants' wages (Seventh Pay Commission) at the state level."
The rating agency also said that the economy would also benefit from the earlier accommodative monetary policy stance of the Reserve Bank of India which has helped to bring down overall interest rate in the financial system. "There may still be some positive impact from the previous accommodative monetary policy stance," the ratings agency said. However, the Reserve Bank signalled in its February meeting that its interest-rate easing cycle had come to end. Fitch expects RBI policy rate to stay at its current level of 6.25 per cent in the foreseeable future.
The Indian economy would also benefit from the higher government spending, it added. RBI Deputy Governor Viral V Acharya on Monday said demonetisation impact on GDP may be seen in the current quarter in some segments.
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