NEW DELHI – India's economy unexpectedly decelerated last quarter with GDP growth dipping to a three-year low as the impact of New Delhi's cash crackdown and a new tax system hurt manufacturing more than expected.
Continue Reading Below
Last November India yanked close to 90% of the cash in circulation out of the market, hoping to dredge up illegally stashed wealth. The move choked cash supply and hurt consumer demand for everything from food to property as most consumers and companies do most of their deals in cash.
Gross domestic product slowed to 5.7% growth in the three months ended June 30, according to government data issued Thursday. That was lower than the 6.1% expansion in the previous quarter and missed economists' expectations of a 6.6% increase. The last time expansion was so weak was in early 2014.
With the latest deceleration, India has ceded its position as the world's fastest-growing large economy to China for the second-successive quarter. China's economy expanded 6.9% in the last two quarters.
The latest data show growth was weighed down by manufacturing. The sector's output grew a tepid 1.2%, slowing from a 5.3% rise in the preceding quarter.
Farm output growth decelerated to 2.3% from 5.2% while construction activity remained sluggish with a 2% expansion, suggesting the ill-effects of the November cash ban have not passed completely.
Continue Reading Below
However, output of hotels and transport services jumped 11.1% while public administration and defense services clocked a 9.5% expansion thanks to an increase in public spending.
India's growth was also held back by the rollout of its complicated goods and services tax from July 1.
The new tax "has resulted in another sharp downturn in business conditions," as entrepreneurs and executives delayed plans to figure out how the tax worked, said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit.
The confusion will continue to hurt business this quarter and is "weighing on the overall GDP growth outlook for the year," he said.
Supporters expect the new tax system to help in the long run. It has broadly been welcomed by economists as it has ended as many as 40 federal and state levies and done away with the need for state border check posts, helping cut costs and ease compliance.
Greater compliance is further expected to lead to an increase in tax revenue.
Chua Han Teng, head of Asia Country Risk and Financial Markets at BMI Research has confidence the country's business environment will improve.
The recent speed bumps will pass "as the government continues to refine the system while businesses and consumers gradually adapt to it over the coming months."
Write to Anant Vijay Kala at firstname.lastname@example.org
(END) Dow Jones Newswires
August 31, 2017 09:48 ET (13:48 GMT)