Meaningful Minutes

People tightened their pocket strings: How much people spend plays a big role in India’s economic growth. After all, it contributes 62.3% to India’s Gross Domestic Product (GDP)—the measure of the economy. This means, anything that affects the way people spend money would affect the overall economy’s growth by a large degree. In the April-June quarter, consumer spending grew 6.7% compared to the previous year. This is slower than the 7.3% growth in the March quarter. This is why; many suggest that demonetisation is the reason behind the drastic fall in economic growth. However, this is worrying. An improvement in private expenditure is crucial for the Indian economy to grow.

Government spends more: The people may have spent less, but the government increased its expenditure by 27% over the June quarter from the previous year. This helped push GDP growth in the quarter. Otherwise, the GDP growth would have fallen further to 4.3%. This increase is because of the government’s planned capital expenditure on building roads and infrastructure. This lead to a 2% growth in the construction sector, which had otherwise been slowing. This is good news because the construction sector is a major source of jobs for workers in the unorganized sector.

The positive effect of demonetization: The demonetization aimed at transforming India from a ‘cash intensive’ to a ‘less-cash’ economy. This worked because digital transactions remained the only option as cash was not easily available. Media reports suggest that this helped the sectors of financial, insurance, real estate, and professional services grow by 6.4% in the June quarter from the previous year. People migrated to formal banking channels from a cash-based system. Banking data too reflects this trend. Bank credits and bank deposits witnessed growth rates of 8.6% and 13.3% in the June quarter.

Tax collection widens: Another positive effect of the move to a digital economy is the widening of the tax base. More businesses were brought into the tax net. As a result, sales tax collection grew by 16.9% in the June quarter. This increase can help improve government revenue and reduce its fiscal deficit—the amount by which the government spends more than it earns. This means the government will have more money to spend on infrastructure, which can help the economy grow.

GST slows manufacturing: It wasn’t just demonetization. Even the newly enforced Goods and Service Tax affected industries and their productivities. Data suggests that the manufacturing sector was hit the hardest. The sector grew only 1.2% in the June 2017 quarter—slower than the 5.3% growth in the January-March 2017 quarter. This slowdown is said to be because of uncertainties associated with the GST launch. Production declined as FMCG companies, car makers and garment manufacturers focused on destocking. This, then, affected profitability. In fact, the operating profits for the corporate manufacturing sector declined 16.8% in the June quarter from the previous year, according to the Centre for Monitoring Indian Economy (CMIE). The silver lining is that this impact may be a one-time effect.