India GDP Growth Slowed to 6.1% Last Quarter--Update

By Raymond Zhong Features Dow Jones Newswires

India said its economy grew 6.1% in the first quarter from a year earlier, the weakest expansion the country has reported in more than two years.

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The surprise slowdown suggested that Prime Minister Narendra Modi's move late last year to void all high-value bank notes continued to choke demand, even as cash was starting to make its way back into Indians' pockets.

The latest quarter's numbers also imply India lost the mantle of fastest-growing large economy to China, whose era-defining expansion has cooled in recent years. India's neighbor across the Himalayas registered growth of 6.9% in the January-March quarter, although many economists question the accuracy of China's data.

India's growth statistics, too, have come in for scrutiny after a revision two years ago caused the official data to seem rosier at times than other measures indicate.

A broad swath of India's economy slowed at the start of the year, figures released on Wednesday showed. Manufacturing, agriculture and services activity all decelerated sharply. Construction, a major income source to many of India's poorest citizens, shrank 3.7%.

Mr. Modi took aim at tax cheats -- and courted chaos -- by invalidating all of India's large-currency notes without warning in November. Left with less than 15% of the previous cash supply, families cut spending and businesses told workers to stay home.

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The money clampdown may not be entirely to blame for the first quarter's loss of momentum, said T.C.A. Anant, India's chief statistician. Speaking to reporters after the announcement, he pointed out that higher commodity prices this year lifted producer inflation, damping inflation-adjusted readings of output growth.

"I would caution against reading a single number which comes out after an event as being reflective of the consequences of the event," Mr. Anant said.

Despite the recent weakness, Indian officials said gross domestic product still expanded by an estimated 7.1% for the year ended March 31. Growth the year before was revised to 8%. China's 2016 GDP growth clocked in at 6.7%.

The quarter's numbers for India came as a jolt to many economists, who had largely expected the economy to have rebounded as newly minted rupee notes filled banks and cash machines nationwide.

Frederico Gil Sander, the World Bank's senior country economist for India, said even at the height of the cash crunch, people were finding ways to make do. Shopkeepers sold on credit. Hole-in-the-wall eateries started accepting smartphone payments.

"It turned out that Indians actually needed a lot less [paper] money than they had been used to in the past," Mr. Gil Sander said.

Still, the longer-than-expected growth slide may deliver a cautionary message for Mr. Modi as he forges ahead with further measures to wean India off paper money, which he has called crucial for combating corruption and tax evasion.

His government this year has outlawed cash transactions larger than $3,000, toughened tax enforcement and encouraged companies to pay wages only by check or direct deposit. For the many shoestring businesses in India that have only ever operated using wads of rupees -- and without paying taxes -- going cashless may not be painless.

"We are a country that doesn't have social security mechanisms, where per capita incomes are abysmally low," said Ritika Mankar Mukherjee, an economist at Ambit Capital, a Mumbai brokerage firm. "So it just makes sense to be very, very cautious, especially when you're taking on reform that's going to create potentially more unemployment for blue-collar workers."

There are signs India's economy remains on solid footing.

With the U.S. and eurozone strengthening, India's exports have been leaping ahead at double-digit rates, reversing a long decline. Indian corporations, which have struggled for years with debt, are repairing their balance sheets. Stocks in Mumbai have hit records.

"After a number of years, both domestic demand and exports are finally on a recovery track," said Derrick Kam, a Hong Kong-based Morgan Stanley economist.

But understanding the precise impact of Mr. Modi's cash experiment -- and therefore predicting how quickly the economy might recover -- has been made difficult by certain limitations in India's statistics.

The government data agency doesn't carry out very regular, detailed surveys of neighborhood stores, back-alley workshops and construction sites. That means it has no good way of measuring the country's giant informal economy, which employs three out of every four working Indians.

So to produce early estimates of manufacturing GDP, for instance, government statisticians assume that informal activity grows at roughly the same pace as formal activity -- a fair assumption in normal times, but not after the cash nullification, which hit tiny factories harder than larger ones.

"On the informal sector, we have to look at proxies because we have no macro data," said Arvind Subramanian, the Ministry of Finance's chief economic adviser, in an interview.

Still, he said, this and other constraints don't diminish the overall validity of India's economic indicators. "They should just be interpreted cautiously, that's all."

Write to Raymond Zhong at raymond.zhong@wsj.com

(END) Dow Jones Newswires

May 31, 2017 12:26 ET (16:26 GMT)