India’s slowing economy is unlikely to rebound for at least a quarter, with economists fearing that a bumpy rollout of a new nationwide tax has dampened business activity.
Government data showed on Thursday the gross domestic product grew 5.7% in the latest quarter, its slowest pace since the January-March quarter 2014.
While the data will be unwelcome to Prime Minister Narendra Modi, who has faced criticism since a shock recall of high-value banknotes last year, numbers indicate the government may not be able to arrest the economy’s slide just yet.
The new tax regime has seemingly disrupted a lot of economic activity and, as an effect, a turnaround in the economy is unlikely in the next two quarters.
“The next quarter impact will be of GST (goods and services tax), which will have an adverse impact on growth overall,” Anjali Verma, economist, Phillipcapital India, told Reuters.
Gross fixed capital formation, which reflects how much companies are investing or are willing to do so, also continues to be a concern. According to the latest data, it has grown at 1.6% compared to 7.4% in the same quarter last year. The number shows companies have not gained back their confidence since the cash ban.
Industry chamber Ficci also said the persistent slack in private domestic investments remained a concern. It asked the Reserve Bank of India for a steeper rate cut.
Mihir Sharma, senior fellow, Observer Research Foundation told NDTV: “We do not have private investment growing, therefore we can’t get GDP growth.”
Industry lobby Assocham said policymakers should take urgent steps to revive private investments. The chamber cautioned the government that further downward risks to the growth still prevail in the form of rising crude oil prices due to the Gulf crisis and inventory drawdown in the US that will have its adverse effects on current account deficit and exchange rate.
With companies still grappling with the new tax rules, business surveys are pointing to more pain ahead.
Credit rating agency Icra said the likelihood of economic growth surpassing 7% for the ongoing fiscal has diminished after the bleak Q1 data.
Economist Hugo Erken, who correctly predicted that the GDP growth would slump to 5.7% in Q1, told Mint the rollout of GST is expected to weigh on the second quarter. “Our Q2 GDP forecast is somewhere near 5.9-6%,” the senior economist at Rabobank’s RaboResearch Global Economics and Markets said.
However, in a silver lining for Asia’s third-largest economy, the services sector gathered steam, posting a growth of 8.7% in the latest quarter, up from 7.2% in the previous three months.
Capital investment also rebounded from a 2.1% contraction in the March quarter.